US Dollar rebounds after Fed's 25 bps cut
- The USD holds losses around the 104.50 area on Thursday's session.
- Despite the daily losses, the Dollar Index gained momentum after the Fed's decision and trimmed daily losses.
- The Committee seems confident to achieve inflation at the rate of 2% over the longer run.
The US Dollar Index (DXY) rebounded somewhat after the Federal Reserve (Fed) cut its benchmark interest rate by 25 basis points, bringing it to 4.50%-4.75%. This followed a larger 50 basis point cut by the Fed at its September 18th meeting.
In a highly anticipated move, the Federal Reserve reduced its Fed Funds Target Range by 25 basis points, bringing it to a 4.50%-4.75% range. This decision aligns with market expectations and suggests the Committee's commitment to achieving maximum employment and inflation at the rate of 2% over the longer run.
While the decision was in line with expectations, it did not provide a clear indication of the future course of monetary policy. The Committee stated that it will continue to assess incoming data and the evolving outlook when making future decisions. However, it did note that the risks to achieving its goals are roughly in balance, suggesting that it is not yet ready to signal a significant shift in its policy stance.
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
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
