Recession Likely But Manageable Given Central Bank Controls, Says Former New York Fed Chairman

Former New York Fed Chairman William Dudley said Tuesday that an economic recession is “highly likely” in 2023 as the central bank works aggressively to rein in inflation.

He added that the Federal Reserve has its finger on the dial and could prevent things from turning into a deep problem.

“What’s different this time, I think, is if we have a recession, it’s going to be a Fed-induced recession and the Fed can end the recession by easing monetary policy afterwards,” he said. Mr. Dudley at Bloomberg.

The Federal Reserve steadily raised interest rates last year in an effort to cool the economy and tackle the highest rate of inflation in four decades.

Soaring costs for consumer items, including groceries, have been a headache for Americans. It has also been a political drag on President Biden, who bet inflation would be temporary, only to see it persist.

Mr. Dudley said that because the Fed controls rates, it could dampen rate hikes and avert catastrophe. He said the bank needed to drive up unemployment to create slack in the labor market and bring wage growth in line with inflation.

“I don’t think there is a great risk of a cataclysm of financial instability pushing the economy into a deep recession,” he said. “I think this is a recession where the Fed is in control; when they need to relax, they can. The challenge for them is not to relax too soon, but to relax in a timely manner.