Bill Dudley Admits Fed Is Hiking Until Something Breaks

Speaking to Bloomberg TV, former NY Fed president and Goldman managing director Bill Dudley brought brief tears of laughter to the eyes of traders when he said the biggest joke today, if not this year: namely that the Fed is not there to take away the market's pain.

  • DUDLEY SAYS FED DOESN'T CARE ABOUT MARKET PRICES FOR THEMSELVES
  • DUDLEY SAYS FED NOT THERE TO TAKE AWAY THE MARKET'S PAIN

And then this: "It’s important that people in the markets should understand that the fed doesn’t care about market prices for themselves. They only care about market prices in terms of how it affects the economy, the unemployment rate and inflation."

Why is this funny? Because taking away the market's pain is precisely what the Fed is meant to do... and Dudley knows it... and those watching Dudley know that he knows it. Hence the hilarity that ensues.

Next, Dudley confirmed what all traders already knew: that the Fed was dovish, but not dovish enough. This took place as the Dow was trading over 1000 point lower than where it was yesterday when the Fed released its statement:

  • DUDLEY: FED MAY NOT HAVE DIALED IT BACK AS MUCH AS MKT WANTED
  • DUDLEY: FED DIALED IT BACK A LITTLE AT MEETING

Dudley had some advice for economists, investors and traders: focus on the Fed's outlook, which incidentally has always been wrong and will be again, but not for the immediate future, when the Fed continues to see "above trend growth"...

  • DUDLEY: KEY TO FOCUS ON FED'S OUTLOOK
  • DUDLEY: FED CONTINUING TO TIGHTEN AS IT SEES ABOVE-TREND GROWTH

... which is notable because it again means that the Fed is focusing on the economy, and not the market, a welcome departure from the Feds of Greenspan, Bernanke and Yellen where the sanctity of the S&P was the supreme goal of all monetary policy.

And this is why stocks suddenly spiked just after 2pm: Dudley's confirmation that if the economy slows down, the Fed would stop hiking...

  • DUDLEY: IF ECONOMY STARTS TO WEAKEN THEY WOULD DEFINITELY PAUSE

... although in the very next sentence, Dudley also makes it clear that the Fed will continue shrinking its balance sheet:

  • DUDLEY SAYS HE EXPECTS FED B/SHEET RUNOFF TO CONTINUE

The former NY Fed president also confirmed he actually read the projections, and noted that the Fed will hike at least 2-3 more times, and that yesterday's hike was not a close call...

  • DUDLEY: TIGHTER FINANCIAL CONDITIONS PROBABLY A NECESSARY THING
  • DUDLEY: TWO OR THREE RATE HIKES BY FED SEEMS MOST LIKELY
  • DUDLEY: RAISING RATES WAS RIGHT THING TO DO, NOT A CLOSE CALL

... for one reason: despite the ongoing market plunge, Dudley is clearly not worried about the level of the S&P, which is not "evidence" that monetary policy is too tight:

  • DUDLEY: NOT MUCH EVIDENCE THAT MONETARY POLICY IS TOO TIGHT

But the punchline, and the one sentence that sent the market right back down was the following admission that the Fed is hiking into a recession, markets be damned:

"[The Fed's] view is, the economy is growing at an above-trend pace. We already have a very tight labor market. We need to slow the economy down, and so somewhat tighter financial conditions aren’t really a bad thing. They’re probably a necessary thing for the Fed to achieve its objectives"

Time to trot out our favorite chart: the one which shows that every tightening cycle ends in a crisis, something which the Fed seems willing to risk this time as well.

In kneejerk response, the Dow surged nearly 400 points when it tried hard to convince itself that Dudley was dovish, however after failing to do so, the Dow has since given back almost half the spike and was once again headed lower.