Akey former Federal Reserve policymaker has stirred debate with a controversial essay about how the US central bank should respond to a worsening economic outlook brought about by the Trump administration’s trade war with China.
Bill Dudley, the former president of the Federal Reserve Bank of New York, said the central bank, in order to achieve the goal of a healthy economy, should “refuse” to dole out stimulus to cushion the damaging effects of the trade war and urged officials to consider how their decisions could even affect the outcome of next year’s presidential election.
The comments from Mr. Dudley, who was also the previous vice- chairman of the interest rate-setting Federal Open Market Committee, come in the wake of last week’s annual central banker powwow at Jackson Hole, Wyoming, where Fed chairman Jay Powell similarly raised concerns about how the Fed responds to
uncertainty around the trade war.
“Trump’s re-election arguably presents a threat to the US and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives,” Mr. Dudley wrote in an op-ed for Bloomberg.
“If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020,” he concluded.
Mr. Dudley said conventional wisdom suggests that if the trade war with China harms the US economic outlook, the Fed should respond by easing monetary policy. Such a response may prove ineffectual, or may make matters worse, “if the Fed’s accommodation encourages the president to escalate the trade war further, increasing the risk of a recession”.
Mr. Powell said at Jackson Hole that positioning trade uncertainty into the central bank’s policy framework was a “new challenge”, acknowledging the Fed’s hands are tied in its ability to influence international trade negotiations.
