The market is still underestimating how hawkish the Fed will be - and it's too soon to worry about going overboard with hikes, says former NY Fed president

• The market is underestimating how hawkish the Fed will be, said former New York Fed President Bill Dudley.
• Policymakers have made it clear that they will err on the side of getting inflation back down to their 2% target, he told Bloomberg TV.

The market is underestimating how hawkish the Federal Reserve will be in its drive to tame inflation, said former New York Fed President Bill Dudley.

Central bank policymakers have made it clear that they will err on the side of getting inflation back down to their 2% target, he told Bloomberg TV on Friday.

"So they're going to be tighter for longer than I think people expect," Dudley said.

In fact, the Fed still hasn't reached a tight monetary environment, he said. The fed funds rate currently sits at a target range of 2.25% to 2.50%, and that is "well, well below what you would consider to be neutral in this current inflation environment."

The Fed is widely expected to increase rates by another 75 basis points when policymakers meet September 20-21, marking the third straight increase of that size.

Meanwhile, other central banks across the globe have moved to raise benchmark rates to tame price pressures. And on Thursday, the European Central Bank raised interest rates by 75 basis points.

Dudley acknowledged the concern that central banks could "collectively overdo it," but that's premature.

"Let's get to a tight monetary policy setting first before we worry about whether the Fed is too tight for too long, as maybe other central banks will ultimately turn out to be," he said.