Dudley: Five Years Above 2% Threatens Fed Credibility

Former New York Fed president Bill Dudley warned the Federal Reserve risks losing credibility after roughly 60 months of inflation above the central bank’s 2% target, comments made as Kevin Warsh begins his tenure as Fed chair.

By March 2026, headline personal consumption expenditures inflation was 3.5% year over year and core PCE stood at 3.2%. Those readings mark about five consecutive years above the Fed’s stated goal. Policy interest rates have remained above 4% since late 2022 while the labor market has stayed firm.

Dudley said higher long-term inflation expectations could unanchor public and market views of future prices and make policy harder to conduct. He argued that structural forces may have raised the neutral real interest rate, the level consistent with stable inflation, citing heavy capital spending linked to artificial intelligence and elevated federal borrowing as factors that could lift the real return investors demand. He added: “I think the case for cutting rates now is actually very, very weak.”

Dudley pointed to survey measures showing modest increases in longer-run expectations, including the University of Michigan five- to 10-year reading and a two-year forward gauge favored by a Fed governor, as indicators of shifting household and business pricing behavior.

Kevin Warsh was sworn in as Fed chair on May 22 after the narrowest Senate confirmation vote on record. In public remarks early in his term he framed inflation as a policy choice, saying, “Inflation is a choice, and the Fed must take responsibility for it,” and adding that maintaining a sound dollar is also a conscious decision for policymakers.

President Donald Trump has publicly urged lower interest rates. Warsh’s slim confirmation margin places additional political pressure on the new chair.

The next personal consumption expenditures report, due in late June, will be the first major inflation reading of Warsh’s tenure. Analysts say a clear move toward the 2% target would alter the policy debate; another sustained miss would focus attention on the Fed’s credibility and the likely path for interest rates.

Background: The Federal Reserve adopted an explicit 2% inflation goal in January 2012. Inflation moved substantially above that level beginning in early 2021 after pandemic-related supply disruptions and large fiscal stimulus. Readings have remained above target over the ensuing five-year period, the span Dudley cited in his warning.