Former New York Fed President: The Fed is more concerned about the labor market than Powell said!

Former New York Fed President Dudley said on Thursday that the reason for the significant rate cut by the Federal Reserve is that its concerns about the labor market exceed those revealed by Fed Chairman Powell.

"I think that in the current situation, they believe that the risks facing the labor market are greater than the risks facing inflation," Dudley said at a discussion sponsored by OMFIF, an independent central bank forum in London, about the Fed's actions.

"I think Powell did a good job explaining this yesterday in a non-alarming way," Dudley said.

The Fed decided to cut its policy rate by 50 basis points to a range of 4.75%-5%, rather than the more gradual 25 basis points adjustment that many economists had expected. Prior to the meeting, Dudley advocated for a 50 basis point rate cut.

Powell said at a press conference that he is not worried about an economic collapse. He said, "I don't see any signs at the moment that the likelihood of a recession is elevated."

Powell emphasized that the Fed sees the risks of deteriorating labor market conditions and rising inflation as balanced. He also stated that the Fed is not pursuing a weak economy. He said, "You can think of this (50 basis point rate cut) as a signal that we are committed to not falling behind."

Dudley stated that the risk balance chart included in the Fed's economic forecasts clearly shows that "the committee's concerns about labor market risks far exceed concerns about unexpected inflation."

In the OMFIF discussion, Dudley said that he believes Powell wanted to cut rates by 50 basis points and persuade the committee to support his view. He pointed out that the Fed's dot plot shows that 9 Fed officials predict only one 25 basis point cut this year, while 10 officials expect two adjustments, a slight majority.

He said, "This indicates that Fed officials are likely to have expected 25 basis point adjustments in the remaining three meetings this year at the start of the meeting, and yesterday's rate cut has already used up two of those adjustments."

Fed Governor Bowman was the only dissenter at the meeting. She is the first of the seven Fed governors since 2005 to dissent.

When asked if Powell might encounter "bond market problems" later this year or next year because market expectations for rate cuts may exceed what he can provide, and he is now "dragging the committee along," Dudley said this is certainly possible. "The market is very aggressive in the short term," Dudley said, adding that he expects the Fed to cut rates by another 50 basis points this year and another 25 basis points. This exceeds the Fed's expected 50 basis point rate cut this year.

But Dudley said ultimately he is not very worried about this issue, "the Fed will do what it needs to do, and the market will be forced to adjust."