Fed’s Williams: Current moderately restrictive monetary policy is appropriate
Federal Reserve Bank of New York President John Williams said late Wednesday that monetary policy is in the right place to allow the Fed to monitor the economy before taking its next decision, per Reuters. Williams added that the impact of trade tariffs is only just starting to hit the economy.
Key quotes
Current ‘modestly restrictive’ monetary policy is appropriate.
Current state of interest rate policy allows Fed time to analyze data.
Tariff impact modest so far but will increase over time.
Tariffs should boost inflation one percentage point rest of 2025 into 2026.
Will need to watch data to understand tariff impact.
It's 'early days' for impact of tariffs on economy.
Overall inflation likely at 2.5% in June, core at 2.75%.
Right now, economy in good place, labor market is solid.
Job growth and labor supply are both slowing.
Economy beset by heightened uncertainty.
U.S. economy to grow around 1% this year.
Unemployment to rise to 4.5% by year’s end.
Inflation to stand at between 3%-3.5% this year.
Inflation to ease to 2.5% next year, 2% in 2027.
Inflation has moderated unevenly, in part due to housing-related factors.Without tariffs, inflation would be closing in on 2%.It's not surprising that tariff impacts have been growing.Not surprised tariff impacts have been modest so far.There's been good news on service sector inflation.Underlying disinflation process is still happening.The job market is in low hiring, low firing mode.
Neutral rate levels haven't really changed much in a while.
Acknowledges economists see slower growth outlook relative to traders, investors and markets.
Financial conditions are pretty supportive of growth.
Current Fed policy is likely to lower inflation, modestly weaken job market.
Market reaction
At the time of writing, the US Dollar Index (DXY) is trading 0.02% higher on the day to trade at 98.30.
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.
