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
FXStreet
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.
