More rate cuts likely, but the data will drive political choices

Vaseline4 days ago

0 2 minutes read

More rate cuts likely, but the data will drive political choices

The President of the Federal Reserve Bank of St. Louis Governor Alberto Musalem said Monday he supports further interest rate cuts as the economy moves forward. Musalem also said performance will determine the path of monetary policy, according to Reuters.

Key quotes

Further gradual reductions in the policy rate are likely to be appropriate over time.

I will not prejudge the size or timing of future policy adjustments.

The personal rate outlook is above the Fed’s median view.

Given where the economy is today, I believe the costs of relaxing too much too soon are greater than the costs of relaxing too little too late.

That’s because sticky or higher inflation would pose a threat to the Fed’s credibility and future employment and economic activity.

He supported the Fed’s decision last month to cut rates by 50 basis points.

Inflation may stop converging” towards the 2% target.

But I think the risks of inflation getting stuck above 2% or rising from there have diminished.

The cooler labor market is still consistent with a strong economy.

Financial conditions continue to support growth.

Some economic activity is slowed by rate policy and electoral uncertainty.

September’s jobs report was very strong.

The job market is strong; is healthy

There is no urgency in the labor market at this time.

The jobs report did not cause a change in outlook.

The current policy path is still appropriate despite the jobs data.

I don’t pay much attention to the market pricing of the Fed outlook.

It will not prejudge the outcome of future Fed meetings.

The Fed’s dot chart is useful for understanding the Fed’s actions.

Market reaction

The US Dollar Index (DXY) is trading 0.03% lower on the day at 102.45 at the time of writing.

Fed FAQ

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability and to promote full employment. Its main tool for achieving these objectives is the adjustment of interest rates. When prices rise too quickly and inflation is above the Fed’s 2 percent target, it raises interest rates, raising borrowing costs throughout the economy. This results in a stronger US dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates to encourage lending, which hurts the greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. Twelve Fed officials participate in the FOMC—the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve rotating one-year terms. .

In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy higher quality bonds from financial institutions. QE usually weakens the US dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of bonds it holds at maturity to buy new bonds. It is usually positive for the value of the US dollar.

Vaseline4 days ago

0 2 minutes read