Fed’s easy policy stance is not riskier, Mester says

Last year, the Fed adopted a new framework that generally means that for the same economic conditions, the Fed will run a more accommodative monetary policy.

For instance, the central bank has said it will not make monetary policy moves based on forecasts but will wait to see actual outcomes. In addition, the Fed has said it doesn’t plan to raise its policy interest rates from close to zero until the economy has reached full employment and inflation has risen to 2% and is on track to exceed that level for some time.

Analysts say there are benefits from the Fed’s new strategy because it allow the labor market to run hotter and allow marginal workers to find better full-time and better-paying jobs.

But many economists also warn that the Fed policies come with a cost.

For instance, former New York Fed President William Dudley said earlier Tuesday that the Fed’s new framework means the Fed will be late and will have to play catch up.

“I think the thing people don’t really fully appreciate is, when they actually have to catch up, the level of short-term rates will be much higher than the 2% rate that is currently priced in financial markets,” Dudley said on Bloomberg Radio.

“There is going to be a big gap between where they are starting and where they need to be to keep the economy from overheating,” he said.

“I am just highlighting where the risks lie. People in the financial markets just need to be cognizant of those downside risks,” he added.

And in a scathing op-ed in the Wall Street Journal, billionaire investor Stanley Druckenmiller said Fed policy is distorting long-term interest rates TMUBMUSD10Y, 1.621% and have also enabled financial-market excess.

U.S. stocks were sharply lower Tuesday morning ith the Dow Jones Industrial Average DJIA, -1.46%, S&P 500 index SPX, -1.15% and Nasdaq COMP, -0.63% all down over 1%.