Former New York Fed chairman says stock market upside is ‘too capped’ as Federal Reserve raises rates higher than expected

According to Bill Dudley, Wall Street is underestimating further rate hikes by the Federal Reserve. The former New York Fed chief told Bloomberg TV he thinks the terminal rate is around 4%.

Former New York Fed Chairman Bill Dudley said financial markets are underestimating the Federal Reserve’s enthusiasm, which could limit the upside for investors.

Fed Chairman Jerome Powell said on Wednesday that while stocks are likely to hike rates after policy becomes more restrictive, markets will follow an aggressive cycle of growth with fears of a dovish pivot.

But Dudley told Bloomberg TV that he did not interpret Powell’s comments as dovish. Instead, he pointed to Powell’s other comments, in particular that rates need to go beyond neutral levels to be moderately restrictive and that the risk of doing too little to fight inflation outweighs the risk of doing too much. Is.

“I think the upside for the markets is heavily overshadowed by the fact that the Federal Reserve needs dire financial conditions to create a labor market sluggishness that we don’t have today,” Dudley said.

In fact, he sees a long runway for the Fed to tighten and projected rates will eventually climb to a terminal level of around 4%, which is now up from 2.25%-2.50%.

He also highlighted that Powell pointed to the Fed’s summary of economic projections – aka the “dot plot” – as a guide on rates. Projections indicate that policymakers expect the federal funds rate to reach 3.25%-3.5% by the end of this year, then climb another 50 basis points next year.

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But others on Wall Street expect the Fed to reverse its strictures, perhaps even later this year.

Pantheon Macroeconomics chief economist Ian Shepardson wrote in a note after Powell’s comments that the Fed may cut rates in September, as “all measures of supply chain pressures and costs have clearly eased in recent months.” Is.”

Meanwhile, the cost of key commodities such as gasoline has also moved higher, on hopes that inflation will ease soon and some pressure from the Fed will ease.

But Dudley said the markets were wrong to think the Fed would reverse course and warned against further stock bullishness.

“Say the equity market was supposed to rally 5 to 10% from here, I’m going to try to get that to the Federal Reserve.”

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