Fed’s Powell: The US economy is in a remarkably good shape
Chief Powell participates in a moderated discussion at the New York Times DealBook Summit, in New York.
Key Takeaways
Independence lets the Fed make decisions for all Americans, not any political party.
There is broad support in both parties for an independent Fed; do not think there is risk of losing it.
The U.S. economy is in remarkably good shape.
Feel very good about where monetary policy is.
Do not think appointment of a "shadow" Fed chair is on the table.
Feel the same institutional relationships between the Fed and the Treasury will continue under the new administration.
Confident of having the same type of relationship with Bessent as with other Treasury Secretaries.
Trump said the same things privately in his first administration as he did publicly.
Asked about the influence of the new Doge program on the central banks, says part of the Fed's independence is that it is self-funded.
Fed tries to be good stewards of the public's money.
The trend towards central bank transparency has been constructive for making policy.
Unemployment is still very low and making progress on inflation.
The economy is in good shape and there is no reason it can't continue.
On a path to more neutral rates over time, though downside risks are less than thought, Fed can afford to be cautious in finding neutral.
Fed is trying to be in a middle place where policy is less restrictive so inflation can fall, but not damage the labor market.
Lower survey response levels are likely increasing volatility in estimates of labor market data.
This section below was published as a preview of the Federal Reserve Chair Jerome Powell's participation at the New York Times DealBook Summit event at 17:45 GMT.
- Comments from Fed Chief Jerome Powell will be closely followed midweek to get clues about the interest rate outlook.
- The Fed is seen reducing its interest rates by a quarter point at this month’s meeting.
- The US labour market takes centre stage this week, with NFP due on Friday.
Federal Reserve Chair Jerome Powell is set to participate in a moderated discussion on the economic outlook on Wednesday at the New York Times DealBook Summit in New York. Investors will closely monitor his remarks, eager for any signals about future monetary policy.
The event comes at a time when markets largely expect the Fed to cut its policy rate by another 25 basis points during its December 17-18 meeting. However, this expectation lost some momentum following Powell's remarks at an event in Dallas on November 14.
During his Dallas speech, Powell indicated that the Fed could take its time before making further rate cuts. He pointed to steady economic growth, a strong labour market, and inflation remaining above the Fed's 2% target as reasons for a cautious approach. His comments aligned with the views of FOMC Governor Michelle Bowman, who has consistently advocated for a prudent stance on rate adjustments.
As of now, the probability of a 25-basis-point rate cut this month stands at approximately 75%, according to the CME Group’s FedWatch Tool. However, investors anticipate no more than 75 basis points of easing over the next 12 months.
The Fed and Trump: A collision course ahead?
The return of former President Donald Trump to the White House has raised concerns about renewed inflationary pressures. His proposed policies could significantly alter the economic landscape, featuring looser fiscal measures, the reintroduction of tariffs on exports from China, Europe, Mexico, Canada, and the BRICS nations, as well as stricter immigration policies.
In fact, a new chapter in the US-China trade war has already begun. China recently announced a ban on exporting gallium, germanium, and antimony to the US – minerals critical for military technologies. This move came just one day after Washington introduced new restrictions targeting China’s semiconductor industry.
While Powell has repeatedly declined to speculate on the economic impacts of potential policies under a renewed Trump administration, it's likely that any resurgence in inflationary pressures could lead the Fed to pause or even halt its current easing cycle.
Amid these developments, the US Dollar (USD) surged in October and November before entering a period of consolidation/correction. However, this pause should be temporary, leaving the bullish outlook for 2025 unchanged.
About Jerome Powell (via Federalreserve.gov)
"Jerome H. Powell first took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. He was reappointed to the office and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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
FXStreet Team
FXStreet
