Former New York Fed President Dudley Predicts Significant Increase in Dot Plot... Is a Rate Hike Imminent?

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] Bill Dudley, former president of the New York Federal Reserve Bank (Fed), anticipated a significant upward revision of the dot plot. The dot plot is an indicator showing the Federal Open Market Committee (FOMC) members' projections for future benchmark interest rates in the United States. This statement is analyzed as a way to prepare the market mentally as the benchmark interest rate hike approaches.

According to KB Securities on the 11th, Dudley recently warned in a contribution to the U.S. economic media Bloomberg that the FOMC meeting on the 14th-15th (local time) could result in tighter monetary policy than expected. With a high likelihood of deciding to accelerate asset purchase tapering, Dudley argued that beyond acceleration, a very rapid tightening path could be presented over the next three years.

Dudley predicted that the median forecast for next year's benchmark interest rate presented by the FOMC would be 0.8%. Currently, the U.S. benchmark interest rate stands at 0-0.25%. Furthermore, he forecasted that the benchmark interest rate would be raised four times in 2023 and reach 2.5% in 2024. The reason is that by that time, the economy will surpass maximum employment levels and inflation will exceed the 2% target for several years.

There is an analysis that Dudley's intention was to prepare the market for the upcoming interest rate hikes. Last month, Dudley also mentioned the possibility of accelerating tapering. Subsequently, former Richmond Fed President Jeffrey Lacker supported Dudley's opinion, and James Bullard, president of the St. Louis Fed, and Charles Evans, president of the Chicago Fed, also advocated for tapering acceleration. Additionally, at the November FOMC, Federal Reserve Chair Jerome Powell declared that he would consider accelerating tapering, making it a foregone conclusion.

Kim Il-hyeok, a researcher at KB Securities, explained, "The New York Fed presidency oversees New York, the center of U.S. finance, working closely with financial institutions, and even after retirement, maintains considerable information and influence based on Fed and financial sector networks. Dudley's influence remains strong."

Currently, Dudley's remarks are interpreted as part of the process of adjusting market expectations regarding the appropriate benchmark interest rate level. Last month, Dudley also projected that the benchmark interest rate could rise to 3-4%, but this is considered unrealistic. Researcher Kim said, "Interest rates cannot be raised arbitrarily, and if the economy contracts while raising rates, it becomes harder to raise them further. His remarks do not imply strong tightening but rather indicate that the policy background will maintain a strong economic expansion and high inflationary pressure."

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