Bill Dudley, former president of the Federal Reserve Bank of NY, discusses the impact of interest rates on real estate, his career journey, market pricing, the importance of Fed independence, 2% inflation target rationale, cyber preparedness, shortcomings of owners equivalent rent, and TV streaming preferences.
The Federal Reserve's challenge is to balance price stability and employment while making monetary policy accommodating enough to support the economy.
The debate on proactive measures to address incipient bubbles remains ongoing, with some arguing for allowing them to run their course and others emphasizing the importance of taking proactive steps to rein them in.
Lax regulation and oversight of the mortgage market allowed non-traditional banks to engage in risky lending practices, contributing to the housing bubble.
Deep dives
Fed's dual mandate and the challenge of balancing inflation and employment
The Federal Reserve's dual mandate is to maintain price stability (around 2% inflation) and maximize employment. Balancing these two goals can be challenging. In the 2010s, the Fed faced difficulty in achieving 2% inflation despite keeping interest rates low due to various factors such as damage to balance sheets and credit scores after the financial crisis. The labor market also presented challenges, with issues like disability, reduced legal immigration, and early retirements reducing the available workforce. However, wage growth and real income have increased, supporting consumer spending. Overall, the Fed's challenge has been to make monetary policy accommodating enough to support the economy and keep inflation around 2%.
Lessons from the 2000s and the importance of proactive measures
In the 2000s, the Fed faced criticism for being late in recognizing and addressing the housing bubble and subsequent financial crisis. The debate surrounding proactive measures to address incipient bubbles remains ongoing. Some argue that it is challenging to identify bubbles and that allowing them to run their course is the best approach. However, others emphasize the importance of taking proactive steps to rein in bubbles and avoid the severe consequences of their collapse. Reflecting on the housing bubble, the need for proactive measures, such as tighter mortgage underwriting standards, becomes apparent in order to minimize the resulting damage.
Regulation and the role of the Fed in the housing bubble
The issue of regulation and the role of the Federal Reserve in the housing bubble is another point of discussion. Critics argue that lax regulation allowed non-traditional banks to engage in risky lending practices, contributing to the bubble. The Fed had some authority in regulating the mortgage market but did not effectively use it. Concerns were raised by individuals like Ned Gramlich, a former Fed governor, but were not adequately addressed. Greater attention to regulation and oversight might have mitigated the risks and consequences associated with the housing bubble.
Challenges of setting an inflation target and future implications
The 2% inflation target adopted by the Fed and followed by other central banks originated from the Reserve Bank of New Zealand. While an arbitrary choice, it was considered low enough not to significantly impact consumption and investment decisions while providing some flexibility in the labor market and creating room for interest rate adjustments during economic downturns. Calls to increase the inflation target face significant obstacles, including the need to maintain public trust and the potential for inflation expectations to become unanchored. The Federal Reserve's focus on achieving its 2% inflation target, supporting a strong labor market, and navigating changing economic conditions remains crucial as it works to fulfill its mandate.
The Financial Industry and the Bubble
The financial industry's practices and innovations played a significant role in fueling the economic bubble. Complex financial engineering techniques allowed the transformation of bad subprime mortgages into highly rated securities. Moreover, the rating agencies' change in payment structure, receiving money from underwriters instead of bond purchasers, contributed to the problem. These factors are often overlooked when discussing the financial crisis.
Alan Greenspan and Market Reactions
Critics argue that Alan Greenspan, former chair of the Federal Reserve, was excessively concerned with how Wall Street perceived him, often accommodating with short-term market reactions. While he effectively managed inflation, his tendency to address relatively small market movements may have had consequences. His blind spot was failing to identify and address bubbles in real-time, waiting for them to burst. By the time his successor, Ben Bernanke, took office, it was too late to avoid the impending crisis.
Bloomberg Radio host Barry Ritholtz speaks to Bill Dudley, a Bloomberg Opinion columnist and former president and chief executive officer of the Federal Reserve Bank of New York, where he also served as vice chairman and a permanent member of the Federal Open Market Committee. He is the chair of the Bretton Woods Committee, and has been a nonexecutive director at Swiss bank UBS since 2019. Previously, he was executive vice president of the Markets Group at the New York Fed, where he also managed the System Open Market Account. He has also been a partner and managing director at Goldman Sachs & Co. and was the firm's chief US economist; vice president at the former Morgan Guaranty Trust Co. Ltd.; and chairman of the Committee on the Global Financial System of the Bank for International Settlements.
