Former central banker wants Fed to ‘inflict more losses’ on stock-market investors to tame inflation

Historically tight labor market

William Dudley, the former president of the powerful New York Fed, thinks that his former colleagues won’t get a handle on inflation that’s running at around a 40-year high unless they make investors suffer.

There are myriad uncertainties the Fed must navigate, he acknowledged, including the effect of easing supply-chain disruptions and a historically tight labor market. But the effects of the Fed’s tightening of monetary policy on financial conditions — and the the effect that tightening will have on economic activity — is one of the biggest unknowns, Dudley wrote.

Unlike many other economies, the U.S. doesn’t respond directly to changes in short-term interest rates, Dudley said, partly because most U.S. home buyers have long-term, fixed-rate mortgages. But many U.S. households, also in contrast to other countries, have a significant amount of their wealth in equities, which makes them sensitive to financial conditions.