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Fed's Paulson says she is approaching December rate decision cautiously

Philadelphia Federal Reserve President Anna Paulson said that she is approaching December’s policy meeting “cautiously,” adding that the central bank must carefully balance slowing labour momentum against lingering inflation risks.

Key quotes

Rate cuts so far have been appropriate, but each raises the bar for the next cut.

With upside risks to inflation, downside risks to employment, monetary policy must walk a fine line.

On the margin still more worried about labor market than inflation.

Expect to learn a lot between now and December Fed meeting.

US Economy doing ok. 

In thinking about monetary policy over the longer arc, focused on balancing inflation, labor market risks.

Bifurcation in economy may have intensified, lower- and moderate-income households struggling.

September labor market report 'encouraging' on balance.

Tariff effects smaller than feared, overall demand environment helping to keep a lid on inflation.

Aggregate growth more dependent than usual on highest earners, growth outlook particularly sensitive to equity valuations.

Market reaction

At the time of writing, the US dollar Index (DXY) is trading around 100.15, down 0.06% on the day. 

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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