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Fed's Goolsbee: US credit conditions are tight and are getting tighter

Federal Reserve Bank of Chicago President Austan Goolsbee said on Sunday that central bank officials should be wary of keeping the restrictive policy in place longer than necessary. 

Key quotes

Credit conditions seem tight and are getting tighter. 

Unemployment is up, and that's a caution sign.

No certainty the Fed will cut interest rates next month, but not doing so could damage the labour market

When you set a rate high like we have and hold it there while inflation falls, you're actually tightening. 

The economic data is a mix of positive indicators and some that are more concerning. 

If you keep too tight for too long, you will have a problem on the employment side of the Fed's mandate.

The impact of past hikes may not be fully realized. 

Market reaction 

The US Dollar Index (DXY) is trading 0.01% higher on the day at 102.60, 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.

Author

Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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