Lindsay (NYSE 🙂 Dunsmuir

(Reuters] – The two ex-Federal Reserve employees are no longer required to make economic policies and will be held accountable. However, they warn the U.S. central banking that it may have to hike interest rates higher than anticipated and there could be a recession – cautions neither of them voiced when leaving their jobs a few month ago.

This week’s remarks from Fed’s most recent vice chair – Richard Clarida who was, until January, one of Chair Jerome Powell’s top lieutenants in monetary policy formulation and Randal Quarles who oversaw bank regulation up to the end last year – rank with a small group of former U.S. central banksers offering critiques about Fed policy.

Clarida has returned to Columbia University as an economist professor. On Friday, he said that to stop inflation and slow down economic growth, the Fed must raise interest rates into “restrictive territory”. Quarles, who is back at the Utah-based firm that he co-founded earlier in the week, said that a recessive situation was “likely”.

Former officials’ sour outlooks come as Powell increases the central bank’s efforts to combat inflation. Powell raised interest rates by a quarter point, promising two additional rate increases by July. This policy of tightening overnight borrowing costs is intended to bring them down to neutral levels of between 2.25%-2.5%, and to allow for further increases if necessary. Powell stated that he sees a plausible path to cool inflation and not causing an economic downturn.

Clarida made the remarks Friday during a Stanford University Hoover Institution conference. He stated that the Fed would need to increase rates by “at minimum” 3.5%, if it is not higher, to lower inflation to its goal of 2%.

Clarida stated that “The Fed has all the tools necessary to face this challenge”, and that officials are well-informed about the risks. He also said Clarida’s role in the Fed allowed him to have a huge impact on policy, but he was restricted from speaking out against Powell’s views. “But the Fed’s instruments are blunt, the mission is complex, and difficult trade-offs lie ahead.”

Quarles, who was at the Fed more outwardly hawkish that Clarida was, was even sharper tongued this week.

He said that it would have been more beneficial to get on top of the matter in September.

Now with inflation pressure intense, unemployment low, and demand far outpacing supply, the effect of rapid rate hikes “is likely to be a recession,” said Quarles, a Donald Trump appointee who left his post in December when he did not get Biden’s nod for a second term.

Clarida was also an Trump appointee and neither he nor Clarida called for rapid rate rises to leave the Fed.

Bill Dudley was also the New York Fed president from 2008 to 2018. He believes that rates have been late and that we will see a recession.

PAIN Ahead

Powell has admitted that it will not be easy to engineer a soft landing in the economy and said that higher borrowing costs ahead would cause some pain for Americans who already struggle with high prices.

He stated Wednesday that “But you know, it’s the great pain in not dealing…with inflation, and allowing this to become entrenched.”

Clarida stated Friday that he had seen that inflation risk was “skewed decisively to the upside” as far back as last summer.

Inflation, currently at 6.6%, according to Fed’s yardstick means that rates must rise to 4.4%. He said.

Clarida gave the remarks to a Stanford conference hosted by John Taylor (the author of this rule). Other economists at the conference argued for higher rates than what the Fed currently signals.

On Friday, the conference will feature two Fed policymakers, St. Louis Fed President James Bullard and Fed Governor Christopher Waller. They have both been advocating for quicker rate increases for several months.

Taylor presented his paper, arguing that the Fed’s policy interest rate (which after this week’s rate increase is in the range of 0.75%-1%) should be at minimum 3%. If you want to reduce inflation to 2% this fiscal year, it could even exceed twice.

Powell stated that he doesn’t expect inflation to fall as fast but rising rates will likely slow it down in the second half of this year. Powell said that although a soft landing is unlikely, it will not be difficult as the economy “is very strong and well placed to handle tighter monetary policy.”

This view was reinforced by Friday’s report that showed U.S. employment growth rose more than anticipated in April. The unemployment rate remained stable at 3.6%.