Inflation fight will be more painful for businesses, households in the months ahead: Former New York Fed president

SINGAPORE: The United States Federal Reserve might have jacked up interest rates yet again to cool red-hot inflation, but the fight against rising prices will be more painful in the months ahead. 

The tighter financial conditions, which are resulting in a weaker stock market, higher bond yields and widening credit spreads, are necessary to slow the economy and drag inflation back down, said former New York Federal Reserve Bank president William Dudley on Monday (Nov 7). 

“I think it's going to be more painful not just for corporate America, but also for US households.”

The US central bank on Nov 2 raised the benchmark lending rate by 0.75 percentage point, the sixth hike this year.

AGGRESSIVE RATE HIKES TO TAME INFLATION

The Fed’s moves are only just starting to have an impact on the pace of economic growth and the tightness of the labour market, said Mr Dudley, a senior research scholar at Princeton University’s Center for Economic Policy Studies, in an exclusive interview with CNA.

“(But) it's gonna take some time for the Fed to achieve its objective of getting inflation back down to 2 per cent.”

The aggressive rate hikes to tame inflation not seen since the 1980s have stoked fears of an impending recession. The latest increase by the Fed takes the benchmark lending rate to 3.75 to 4 per cent, the highest since January 2008.

Investors expect the Fed to raise interest rates to 5 per cent next year to cool demand.

Central banks around the world have been tightening their monetary policy to combat surging inflation and rein in price pressures. 

“Short-term rates are gonna be higher than where they are today, probably peaking at around 5 per cent or a little bit higher,” said Mr Dudley, who was speaking on the sidelines of the Future of Finance Forum. 

“And the Fed is gonna have to keep those rates at 5 per cent for quite some time to actually achieve their objective of getting us back down to 2 per cent inflation.”

US RECESSION VIRTUALLY INEVITABLE

Mr Dudley believes a recession in the US “is virtually inevitable at this point” and expects it sometime next year. 

“Now, I don't think the recession when it does arrive is going to be particularly deep, because household and corporate balance sheets are in quite good shape,” he said. “I don't expect it to be severe.”

The policy-setting Federal Open Market Committee said more rate hikes will be needed to tamp down rising prices. 

However, it will also consider the impact on the economy when deciding on the pace of future moves. 

Fed Chair Jerome Powell had cautioned that policymakers are not yet ready to halt their efforts. 

"It will take time, however, for the full effects of monetary restraint to be realised, especially on inflation," Mr Powell said. "It's very premature, in my view, to be thinking about or talking about pausing our rate hike.”

Mr Dudley said there are no easy solutions to the challenges facing the global economy. 

However, he noted that improving ties between world superpowers US and China would be crucial. 

“Obviously, what happens in terms of the Russian-Ukraine war is also important, because that creates a lot of risks to energy and food prices,” he added. “Lastly, we have to do a better job of trying to help low-income countries deal with very large sovereign debt burdens.”