Former New York Fed President Bill Dudley says the Federal Reserve’s ability to prop up the economic recovery is getting weaker, warning that fiscal policymakers are the only ones who can provide much needed stimulus.
“The efficacy of monetary policy is rapidly diminishing,” Dudley said at the Yahoo Finance All Markets Summit on Monday.
A standoff between Senate Republicans, House Democrats, and the White House leaves the prospect of more stimulus in question. With the election next week, concerns are building that businesses and households across the country will get no help potentially until inauguration next year.
The lack of stimulus casts a shadow over the Fed’s next scheduled meeting right after the election, on November 4 and 5. With interest rates already near-zero, Fed officials have suggested that they could lean more heavily on quantitative easing to provide further accommodation if the recovery looks flat.
But Dudley expressed skepticism about the ability of the Fed to boost the economy.
“We’re already seeing the interest-sensitive sectors of the economy doing fine,” said Dudley, who led the New York Fed from 2009 until 2018. “So if the Fed did more, what would be the effect on the economic trajectory? It would be very, very modest.”
Dudley questioned the efficacy of more unconventional monetary policy tools, adding that negative interest rates would come with the risk of “scaring people.” Dudley clarified that he does not expect the Fed to seriously consider negative rates, and Fed officials themselves have swatted down the possibility of deploying such a policy.
Dudley said he would expect the Fed to further press fiscal policymakers on stimulus, warning that if the reopening slows amid rising case counts, economic data could “show a distinct weakening trend in coming months.”
On Monday, equity markets sold off with the Dow shedding over 800 points by 12:30 p.m. ET. Dudley said the resurgence in COVID-19 cases and the lack of fiscal policy stimulus were to blame for market jitteriness.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.