|

Fed's Musalem : Expect growth this year lower than trend

St. Louis Federal Reserve President Alberto Musalem said on Friday that he expects the economic growth this year to be lower than the trend, per Reuters.

Key takeaways

"Tariffs if implemented poses upside risks to inflation, don't know if that's months, quarters or years."

"On balance, financial conditions have tightened."

"If tighter financial conditions sustain for a few months that would affect economic activity."

"Higher inflation and softer labor market closer to baseline scenario now."

"If inflation expectations become unanchored, have to prioritize fighting inflation."

"Tariffs will dampen activity as companies rethink supply chains, consumers face higher prices."

"Uncertainty on tariff announcements also a headwind."

"Could take quarters, years for tariff effects to make their way through economy."

"Effect of tariffs on prices could also have an effect on wages.

Market reaction

The US Dollar struggles to find demand following these remarks. At the time of press, the US Dollar Index was down about 1% on the day at 99.92.

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

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

More from Eren Sengezer
Share:

Editor's Picks

AUD/USD: Next on the upside is 0.7000

AUD/USD leaves behind Monday’s downtick and trades with marked gains, approaching the critical 0.7000 yardstick ahead of the opening bell in Asia on Wednesday. The pair’s solid performance follows the Greenback’s fresh downward trend amid cooling geopolitical tensions and caution ahead of the US CPI data.

USD/JPY extends retreat below 158.50 as intervention risks loom

USD/JPY is dropping below 158.50 in the Asian session on Tuesday, snapping a two-day winning streak and pulling back from an over two-week top touched the previous day, despite Japan's soft PPI inflation print. Bulls turn cautious amid speculation that authorities will step in to prop up the Japanese Yen, which, in turn, weighs on the pair.

Gold: Bears struggle to breach below $4,150

Gold now gives away its initial gains and resumes its decline, revisiting the $4,160 region per troy ounce on Tuesday. The precious metal’s pullback comes despite the fresh downward trend in the Greenback in combination with a mixed performance of US Treasury yields across the board and easing tensions on the geopolitical front.

HYPE falls to $80 as ETF outflows and flat volume weigh on Hyperliquid
Hyperliquid (HYPE) declines 4% on Tuesday, briefly touching $80 as perpetual volumes stay flat and institutional interest decreases. Perpetual volume on the platform saw a modest increase last week from $41.5 billion to $42.5 billion. The metric matters because 99% of fees Hyperliquid captures from trading volume flow toward token buybacks.
S&P 500 earnings just hit a record. The AI data centre bill hasn't landed yet
S&P 500 companies are on track for a third straight quarter of earnings growth above 25%, according to FactSet. Their profit margin hit 17% in the April-June quarter, the highest in FactSet data going back to 2009. The cash behind those earnings has been shrinking for two years, and almost all of the shrinkage is in the handful of companies building data centres for artificial intelligence (AI).
Has Bitcoin really escaped the macro forces it was built to fight?
Over 17 years ago, Satoshi Nakamoto designed Bitcoin (BTC) on the back of a global financial crisis as an alternative to the global monetary system outside the control of central banks, governments and traditional intermediaries. This raises a key question: has Bitcoin really become independent of the macroeconomic forces it was built to challenge?