There’s a pretty good chance that the Fed’s bet on a goldilocks economic scenario for next year will go wrong, former New York Fed Presidental Bill Dudley warned in a Bloomberg column on Monday.

Dudley served as president of the Federal Reserve Bank of New York from 2009 to 2018 and has been a nonexecutive director at Swiss bank UBS since 2019. He is a frequent opinion columnist at Bloomberg.

“The US Federal Reserve and its chair, Jerome Powell, are betting that they can have the best of both worlds — that they’ll be able to defeat excessive inflation without forcing the economy into recession. I hope it goes well,” Dudley wrote. “Unfortunately, there’s still a significant chance it won’t.”

Jerome Powell appeared to take a surprisingly dovish stance on inflation and interest rates at his press conference last week. Risk assets and Treasuries rallied at what was perceived to be a Fed endorsement of the likelihood of multiple rate cuts next year and forecasts of officials showing inflation would fall next year while the economy continued to grow and unemployment remained low.

Dudley said that Powell had taken additional rate increases “off the table” and put the possibility of rate cuts on the table. The projections of Fed officials show that if the economy develops as expected, the Fed could cut rates by three times or more next year.

But the rally in equities and fall in Treasury yields in response to this shift could reignite growth—and inflation.

“Problem is, the central bank’s dovishness also increases the possibility of no landing at all — that is, overheating and persistent inflation that could undermine the Fed’s credibility, while requiring renewed tightening and a deeper recession to get things back under control,” Dudley warned.

Dudley wrote:

There’s plenty that can go wrong. The slowdown in growth at the end of 2023 might reverse in 2024, as happened a year earlier. What appears to be weakness in spending could prove to be merely bad seasonal adjustment of the data. This year’s large increase in labor supply might not extend into 2024, leaving the job market too tight and wage inflation too high (as Powell noted, the current trend of 4% probably isn’t consistent with sustainable 2% inflation). Prices could accelerate again after the unwinding of transitory phenomena, such as pandemic-fueled demand for goods and supply-chain disruptions. Services inflation (excluding housing) might prove more stubborn than expected. As Powell has noted, the “last mile” in reaching the 2% inflation target should be more difficult.

Powell has repeatedly emphasized that the Fed must finish the job, ensuring inflation gets back to 2% and stays there. Yet the more weight he puts on cutting rates to avoid a recession, the greater the risk of failing to control inflation — and of markets getting a big, unpleasant surprise.

Markets appeared to take little notice of Dudley’s warning on Monday. Treasury yields and major stock indexes were close to unchanged by midday.