Dudley: Fed credibility at risk as Warsh faces inflation
Former NY Fed president Bill Dudley warned the Fed could lose credibility after five years of inflation above 2% as Kevin Warsh begins his term as chair.
Bill Dudley, former president of the Federal Reserve Bank of New York, cautioned on Tuesday that the Federal Reserve risks losing credibility after roughly five years of inflation running above its 2% target as Kevin Warsh begins his first week as Fed chair.
Dudley pointed to about 60 months of readings above the Fed’s 2% goal. Headline personal consumption expenditures inflation was 3.5% year over year in March 2026, and core PCE measured 3.2%. Policy interest rates have been above 4% since late 2022. He warned that persistent overshoots and rising long-term expectations could unanchor public inflation expectations and complicate policy choices.
Dudley argued that structural factors may have raised the neutral real interest rate, which would reduce the restrictive effect of current policy. He cited heavy capital spending tied to artificial intelligence and higher federal borrowing as possible drivers. Market and survey measures have pushed longer-term expectations higher.
Dudley added, “I think the case for cutting rates now is actually very, very weak.”
Kevin Warsh was sworn in as Fed chair on May 22 after the narrowest Senate confirmation vote on record. He has framed inflation as a policy choice, stating “inflation is a choice” and that the Fed must take responsibility for price stability. His confirmation occurred amid public pressure for lower rates.
Market participants have frequently diverged from central bank signals. Longer-run survey measures of inflation expectations, including the University of Michigan five- to 10-year reading, have edged higher. A two-year forward gauge favored by Governor Chris Waller has also drifted up.
The next personal consumption expenditures report, due in late June, will be the first major data test of Warsh’s tenure. Some analysts say a sustained return toward 2% could reduce calls for rate cuts, while another miss could increase arguments to delay cuts until the inflation path is clearer.
The Fed formally adopted a 2% inflation target in January 2012. After years of trying to lift inflation to that level, readings reversed in early 2021 when pandemic-related supply disruptions and large fiscal stimulus pushed prices higher, producing a multi-year stretch of readings above the target.
Articles by this author
