Former New York Federal Reserve President Bill Dudley said on Tuesday that the US central bank faces a danger to its credibility as an inflation-fighting institution after inflation has failed to return to the Fed's 2% target for more than five years.
Speaking on Bloomberg Television's Surveillance, Dudley highlighted the risk that inflation expectations could become unanchored. He referenced the University of Michigan's preliminary survey, which shows rising long-term inflation expectations, and pointed to a two-year inflation outlook that has been emphasized by Fed Governor Christopher Waller.
Those comments arrive as Kevin Warsh prepares to chair his first Federal Open Market Committee meeting next month. Warsh assumes the role in the wake of the largest monthly rise in the consumer price index since 2023 and following public criticism from President Donald Trump directed at former Chair Jerome Powell for not moving more quickly to ease monetary policy.
Dudley questioned whether the stance of monetary policy has in practice been restrictive. He noted that the US economy has continued to grow near estimates for full employment even though policy rates have been at or above current levels since November 2022.
The former Fed official suggested the neutral interest rate - the rate consistent with stable inflation and full employment - could be structurally higher than the central bank currently assumes. In explaining that view, Dudley cited two factors he said are reshaping the balance between investment and savings: an investment surge driven by artificial intelligence and a rise in US government debt that reduces the supply of savings available to finance private investment.
Dudley also said the Fed's credibility challenge is compounded by Warsh's appointment and by President Trump's calls for lower rates. He argued that if the Fed's independence were not in question, inflation expectations would be more likely to remain anchored.
"The case for cutting rates now is actually very, very weak," Dudley said.
The comments underscore the tension confronting monetary policymakers as they weigh inflation dynamics, public expectations and competing political pressures while preparing for the next FOMC meeting.