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Fed’s Musalem urges near-term rate hike as policy remains overly loose
Interest rates will need to rise “again soon”, St. Louis Federal Reserve (Fed) President Alberto Musalem said on Friday. He favours a gradual approach, echoing earlier comments from Richmond Fed President Thomas Barkin.
With “inflation remains elevated” among his observations, Musalem signalled the need for further tightening in prepared remarks for the Shadow Open Market Committee, a gathering of economists focused on the Fed. He also described monetary policy and financial conditions as still “accommodative.”
Main points from Musalem’s remarks:
Earlier rate rises reduce risks to the broader economy
The US central bank will raise interest rates again soon
Incremental rate changes are preferable to abrupt adjustments
Expectations of higher policy rates are driving elevated long-term bond yields
Inflation is still high and unlikely to fall without central bank action
Monetary policy continues to be accommodative
Financial conditions remain supportive
Restoring price stability is the best course of action now
Financial conditions have tightened only modestly
The broader economy and labour market remain resilient
The balance of risks still points towards elevated inflation
Expectations for inflation remain stable
The economy’s underlying strength is confirmed by Q3 data
US Dollar Performs Best Against the Euro Today
Today’s percentage moves in the US Dollar (USD) against the major currencies listed appear in the table below. The Euro was the currency against which the US Dollar performed best.
| 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 the 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. Selecting the US Dollar on the left and following that row across to the Japanese Yen, for instance, gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.
Federal Reserve Questions Answered
The Federal Reserve (Fed) sets US monetary policy with a dual mandate: maintaining price stability and promoting full employment. Adjusting interest rates is its main means of pursuing these objectives. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, the central bank raises rates, making borrowing more expensive across the economy. By making the US a more appealing destination for international investors’ funds, this strengthens the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut interest rates to stimulate borrowing. Such a move puts pressure on the Greenback.
At the Federal Reserve’s (Fed) eight annual policy meetings, the Federal Open Market Committee (FOMC) reviews the state of the economy and decides on monetary policy. Twelve Fed officials take part in the FOMC: all seven members of the Board of Governors, the president of the Federal Reserve Bank of New York and four of the other eleven regional Reserve Bank presidents. Those four serve rotating one-year terms.
When faced with extreme circumstances, the Federal Reserve may turn to Quantitative Easing (QE), a policy that sharply expands the flow of credit through a stalled financial system. This unconventional measure is deployed during crises or periods of exceptionally low inflation. The Fed chose it as its main response during the Great Financial Crisis in 2008. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions, a process that usually weakens the US Dollar.
By reversing QE, quantitative tightening (QT) generally supports the value of the US Dollar. Under this policy, the Federal Reserve halts bond purchases from financial institutions and, as bonds in its portfolio mature, does not reinvest the principal in new bonds.
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