AUD/USD declines despite Fed cutting rates by 25 bps
- AUD/USD declined despite a 25 bps rate cut from the Federal Reserve.
- The Dollar Index trimmed daily losses after the Fed's decision, which weighed on the AUD/USD despite its initial rise.
- Fed policymakers expressed a balanced economic outlook, with risks to inflation and growth.
The AUD/USD currency pair declined but holds gains around 0.6640 after the Federal Reserve (Fed) cut its target range for the federal funds rate by 25 basis points on Thursday. Despite the Fed's rate cut, the AUD/USD's initial increase was capped by a recovery in the US dollar. The Fed's move comes amid ongoing concerns about rising inflation, with the central bank acknowledging a mixed economic outlook.
In their statement, Fed policymakers acknowledged the economic expansion but noted easing labor market conditions. They also recognized the progress made towards their inflation target but emphasized that it remains elevated. Despite these concerns, the Fed expressed a neutral outlook, indicating that risks to inflation and growth are roughly balanced. The central bank's decision to continue reducing its balance sheet and its commitment to data-dependent policymaking suggest a cautious approach to future rate cuts.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing 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 may lower interest rates to encourage borrowing, which weighs on 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. The FOMC is attended by twelve Fed officials – 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 one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 in 2008. It involves the Fed printing more Dollars and using them to buy high grade 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 from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
