Former New York Fed President William Dudley said the Federal Reserve now has ample justification to keep monetary policy tight, arguing that a possible rate hike in September should not be treated as a one-off move. He said U.S. inflation remains above the Fed’s 2% target, the labor market is still relatively stable, and the 0.3% month-over-month rise in core CPI in August has weakened hopes that inflation pressures are fading.
Dudley said the Fed is clearly off target on price stability under its dual mandate and warned that inflation still carries upside risk in the near term. He expects the Fed’s Summary of Economic Projections, due in September, could show a median forecast for two cumulative rate hikes in 2026, with each move sized at 25 basis points.
He also pointed to historical precedent, saying the probability of another hike after an initial increase has been as high as 85% to 90% over the past several decades. Dudley added that if Warsh moves decisively on rates, it could help demonstrate both his anti-inflation resolve and the Fed’s policy independence. At the same time, he warned that monetary policy should not be effectively outsourced to financial markets, and that the future path of rates should be set by the Fed’s reading of economic data and its own policy judgment, not by market expectations.
Former New York Fed President William Dudley said the Federal Reserve has strong reasons to keep tightening monetary policy, adding that a rate hike in September may not be a one-time move but the beginning of a run of consecutive increases.
Dudley said U.S. inflation remains above the Fed’s 2% target, while the labor market is still relatively stable. He also cited August core CPI, which rose 0.3% month over month, saying the reading has eased market confidence that inflation is cooling.
Dudley says the Fed is off target on price stability
In his view, the Fed is clearly falling short of its dual-mandate objective on price stability, and inflation still faces upside risk in the near term.
Dudley expects the Fed’s Summary of Economic Projections, scheduled for release in September, could show a median forecast for two cumulative rate hikes in 2026, with each increase set at 25 basis points.
Odds of another hike after one move stand at 85% to 90%
He also said that over the past several decades, the probability of the Fed raising rates again after a single hike has been as high as 85% to 90%. For that reason, he said markets should not view the current move as a brief or isolated step.
Dudley added that if Warsh raises rates decisively, it could help show his determination to curb inflation as well as the Fed’s policy independence.
He also warned that Warsh should not "outsource" monetary policy to financial markets. The future path of interest rates, he said, should be determined by the Fed on the basis of economic data and its own policy judgment rather than by accommodating market expectations.
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