The fear of Federal Reserve interest-rate increases have helped send stock and bond prices down in recent months.
The S&P 500 has slid 6% so far this year, and the 10-year Treasury yield has climbed 115 basis points.
But for the Fed to get inflation under control, the carnage will have to get worse, William Dudley, former president of the New York Federal Reserve Bank, wrote in a column on Bloomberg.
Consumer prices soared 7.9% in the 12 months through January.
“To be effective, [the Fed] will have to inflict more losses on stock and bond investors than it has so far,” he said.
The Fed’s policy affects the economy by affecting financial conditions, Dudley notes.
“So far, the Fed’s removal of stimulus hasn’t had much effect on financial conditions,” with stocks and bonds not moving that much, he said.
“Financial conditions need to tighten,” Dudley said. If this doesn’t happen on its own (which seems unlikely), the Fed will have to shock markets to achieve the desired response.”
Jamie Dimon Weighs In Again
Meanwhile, JPMorgan Chief Executive Jamie Dimon referenced the Fed’s impact on financial markets in a recent letter to shareholders.