Former Federal Reserve Bank of New York President Bill Dudley warned that the U.S. central bank’s credibility as a force against inflation is at risk of eroding due to its prolonged failure to meet the 2% inflation target.
“We’ve been above the Fed’s inflation target for more than five consecutive years,” Dudley said Tuesday in an interview program. “Inflation expectations could eventually become unmoored.”
His remarks highlighted the challenges facing new Federal Reserve Chair Kevin Warsh, who will lead the first meeting of the Federal Open Market Committee (FOMC)—the body responsible for setting interest rate policy—next month. Warsh takes office as consumer price index (CPI) inflation posted its largest single-month increase since 2023, following President Donald Trump’s ongoing criticism of former Chair Jerome Powell for failing to ease monetary policy.
Dudley noted that preliminary surveys from the University of Michigan indicate rising long-term inflation expectations, a point reinforced by Federal Reserve Governor Christopher Waller’s emphasis on two-year inflation outlooks. Since November 2022, despite interest rates remaining at or above current levels, the U.S. economy has continued to grow and is approaching full employment, leading Dudley to question whether monetary policy is truly contractionary.
Dudley said that the neutral interest rate level—neither restraining nor stimulating the economy—might be higher than the central bank expects. He pointed out that the investment boom driven by artificial intelligence, along with rising U.S. government debt levels, is reducing savings available for investment.
Dudley said that Wash’s appointment and Trump’s demand for lower interest rates have intensified the credibility challenges facing the Federal Reserve.
“If the Federal Reserve’s independence is not questioned, inflation expectations are more likely to remain stable,” Dudley said. “The case for lowering interest rates now is actually very, very weak.”
