Fed’s Musalem urges near-term rate hike as policy stays too loose

Rates will need to rise “again soon”, St. Louis Federal Reserve (Fed) President Alberto Musalem said on Friday. He favours gradual increases, echoing earlier comments by Richmond Fed President Thomas Barkin.

Addressing the Shadow Open Market Committee, a group of economists focused on the Fed, Musalem said in prepared remarks that “inflation remains elevated,” signalling a need for additional tightening. He described both current monetary policy and financial conditions as “accommodative.”

Main points:

Earlier rate increases reduce risks to the broader economy

US central bank set to raise rates again soon

Incremental rate changes favoured over abrupt adjustments

Expectations of higher policy rates drive elevated long-term bond yields

Inflation is still high and unlikely to fall without central bank action

Monetary policy continues to be accommodative

Accommodative financial conditions persist

Restoring price stability is the best course of action now

Financial conditions have tightened only marginally

Broader economy and labour market remain resilient

Risks are still skewed towards high inflation

Inflation expectations continue to hold steady

Underlying economic strength confirmed by Q3 data

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

US Dollar: Today's Currency Performance

Against the major currencies listed below, the US Dollar (USD) recorded its strongest performance against the Euro today. The table details the day's percentage changes.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.21%	-0.14%	-0.17%	-0.28%	-0.07%	-0.06%	-0.12%
EUR	-0.21%		-0.34%	-0.35%	-0.47%	-0.26%	-0.27%	-0.31%
GBP	0.14%	0.34%		-0.02%	-0.13%	0.08%	0.08%	0.02%
JPY	0.17%	0.35%	0.02%		-0.10%	0.10%	0.10%	0.05%
CAD	0.28%	0.47%	0.13%	0.10%		0.20%	0.21%	0.16%
AUD	0.07%	0.26%	-0.08%	-0.10%	-0.20%		0.00%	-0.04%
NZD	0.06%	0.27%	-0.08%	-0.10%	-0.21%	-0.00%		-0.04%
CHF	0.12%	0.31%	-0.02%	-0.05%	-0.16%	0.04%	0.04%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. To read USD (base)/JPY (quote), for instance, start with the US Dollar on the left and follow that row across to the Japanese Yen. The intersecting cell gives the pair's percentage change.

Fed: Key Questions Answered

The Federal Reserve's role and its influence on the US Dollar

Price stability and full employment are the Federal Reserve's (Fed) two mandates. As the institution responsible for US monetary policy, it relies primarily on interest rate adjustments to meet those objectives. If inflation exceeds the Fed's 2% target and prices climb too rapidly, the central bank increases rates. Higher borrowing costs across the economy make the US more attractive to international investors allocating capital, strengthening the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut rates. Such cuts encourage borrowing and put pressure on the Greenback.

Eight meetings a year: The Fed's policy schedule

Eight times a year, the Federal Reserve (Fed) convenes policy meetings at which the Federal Open Market Committee (FOMC) reviews economic conditions and decides monetary policy. Twelve Fed officials participate in the FOMC: the seven Board of Governors members, the president of the Federal Reserve Bank of New York and four presidents drawn from the other eleven regional Reserve Banks. Those four serve rotating one-year terms.

Quantitative Easing (QE): How it affects USD

To substantially expand credit flows when the financial system is stalled, the Federal Reserve may turn to Quantitative Easing (QE) in extreme circumstances. This unconventional measure is deployed during crises or periods of exceptionally low inflation. During the Great Financial Crisis in 2008, QE was the Fed's preferred tool. The process involves printing additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar typically weakens under QE.

Quantitative Tightening (QT): Implications for the US Dollar

Usually supportive of the US Dollar's value, Quantitative Tightening (QT) reverses QE. Under QT, the Federal Reserve halts bond purchases from financial institutions. It also refrains from reinvesting the principal repaid on maturing bond holdings in new bonds.