Federal Reserve Bank of San Francisco President Mary C. Daly said late Thursday that the central bank needs modestly or moderately restrictive policy to keep bringing down inflation.
Key quotes
Two rate cuts this year would make sense if the labor market stays solid and inflation falls, but the range of possible risks is large.
Currently tilt toward a focus on inflation.
Need a modestly or moderately restrictive policy to keep bringing down inflation.
Looking for signs inflation is continuing to fall, or if it’s rising or staying sticky.
Also looking for any weakening in the job market, not seeing any.
Not facing policy tradeoffs now.
The Fed is agile, and policy is well-positioned.
Businesses are not stalled in the face of uncertainty, though taking fewer risks.
Keeping the Fed policy rate steady is an active decision.
Market reaction
The US Dollar Index (DXY) is trading 0.11% lower on the day at 99.25, as of writing.
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.
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