The Fed has caused a recession every time it's tried to weaken the labor market, and a 'soft-landing' of the economy is unlikely, former New York Fed chief Bill Dudley says

Powell has repeatedly cited a tight labor market as a reason to keep pushing ahead with the Fed's aggressive monetary policy tightening.

• The Fed has sparked a recession every time it's tries to tackle a hot labor market, former Fed official Bill Dudley said. 
• Powell has repeatedly cited a tight labor market as to why interest rates need to remain restrictive.
• Dudley believes a soft-landing is unlikely, and a recession is looming in the medium-term. 

The Fed has caused a recession every time it's tried to weaken the labor market as it is currently doing, and a soft-landing of the economy is looking unlikely, according to former New York Fed chief Bill Dudley.

In an interview with Bloomberg on Wednesday, Dudley said it was unlikely the Fed would be able to steer the economy away from a recession, despite the insistence of market bulls who say the US will avoid a downturn. 

While the economy still has a lot of momentum, Dudley predicted a downturn on the horizon given how much more central bankers need to tighten the economy to rein in inflation. Prices are still well-above the Fed's 2% target, and the labor market is still hot, with the US adding a stunning 517,000 new jobs in January. Meanwhile, unemployment is at a 53-year-low of 3.4%.

That suggests the Fed needs to continue its efforts, despite having already hiked interest rates 450-basis-points to lower inflation. Rates that could easily overtighten the economy into a recession, economists have warned.

"I do think though that recession is likely in the medium-term, because the Fed has to push up the unemployment rate by a meaningful amount to generate that slack in the labor market," Dudley said. "And every time the Fed has pushed up the unemployment rate by more than half of a percentage point, we've always ended up in a recession. I just don't see this time being any different."

Markets are pricing in just two more 25-basis-point rate hikes to come from the Fed, but Powell has repeatedly cited a tight labor market as a reason why interest rates need to remain at restrictive levels. Previously, he warned that rates could remain high throughout 2023, spelling trouble for the economy.

But even if central bankers overdo it and spur a downturn, the Fed can easily reverse that damage, Dudley said. He noted that a full-blown financial crisis was unlikely, thanks to reforms put in place from the 2008 crisis, and the Fed's ability to cut high interest rates to stimulate the economy. 

"The risk of staying too tight too long is less than the risk of not doing enough, because the Fed has the ability to support the [economy] when the time comes," he added.