Fed's Schmid: Lower rates would be appropriate if inflation continues to fall
Federal Reserve Bank of Kansas City Jeffrey Schmid said on Thursday that lowering monetary policy would be "appropriate" should inflation continue to come in low.
Key quotes
If inflation continues to come in low, it will be appropriate to adjust policy.
Current stance of Fed policy is 'not that restrictive.'
Financial conditions can impact real economy, but Fed must remain focused on dual mandate.
Fed is close but 'still not quite there' on reaching 2% inflation goal.
More confident that inflation is on path to target, given recent 'encouraging' inflation data.
Price data is volatile, should look for the worst in the data rather than the best.
Has been 'noticeable cooling' of labor market, but overall it still appears healthy.
Cooling labor market is a necessary condition for easing inflation.
The story could change if conditions were to weaken considerably.
The path of Fed policy will be determined by data and strength of the economy.
Would not want to assume any particular path or endpoint for policy rate.
Market reaction
The US Dollar Index (DXY) is trading 0.07% higher on the day at 103.28, 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
FXStreet
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.
