Two more rate hikes: Fed’s Logan urges further increases; pause won’t change path

“at least two more quarter-point rate hikes” are needed. That was the message from Dallas Federal Reserve President Lorie Logan on Friday. Skipping an increase “doesn’t change policy destination,” she said, while moving interest rates “gradually” lowers the risk of a sharp deterioration in the economy.

Describing rising inflation as “unacceptable”, Logan said that, after rates had increased by 50 basis points, “a pause would make sense” to assess the policy path ahead.

Policy and economic highlights:

At least two further quarter-point rate increases are needed from the Fed

The policy destination remains unchanged if the Fed skips a meeting

A gradual approach to policy adjustment can limit the risk of a sharp economic downturn

Households, businesses and investors can adapt to higher rates when policy changes gradually

A modestly restrictive policy stance is the ultimate objective

Clarity on the final policy rate helps the economy adjust and benefit from a skipped increase

2% Fed inflation target: failure to move back towards it is 'Unacceptable'

50 bps of rate increases would warrant a pause to assess which further steps are appropriate

The economy is receiving support from financial conditions

Investors are signalling through higher market rates that monetary policy still has work to do

Despite rising, long-term rates are exerting less of a drag on the economy than might be expected

Robust economic growth is accompanied by solid consumer spending

The labour market remains balanced, though it may be tightening slightly

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

Federal Reserve: Key Questions

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 pursue these objectives. If prices rise too rapidly and inflation exceeds the Fed’s 2% target, the central bank increases rates. Borrowing becomes more expensive across the economy, while the US becomes a more attractive destination for international investment. This strengthens the US Dollar (USD). By contrast, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut rates. The aim is to stimulate borrowing, but the effect weighs on the US Dollar.

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 the economy and decides monetary policy. Twelve Fed officials attend the FOMC: 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): Credit Support and the USD

A financial system in which credit flows have stalled may lead the Federal Reserve to deploy Quantitative Easing (QE) in extreme circumstances. Through QE, the Fed substantially expands the supply of credit. Reserved for crises or periods of exceptionally low inflation, this unconventional policy was the Fed’s preferred response during the Great Financial Crisis in 2008. The central bank prints additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar typically weakens under QE.

Quantitative Tightening (QT): Reversing QE and Supporting the US Dollar

Usually supportive of the US Dollar, Quantitative Tightening (QT) reverses QE. The Federal Reserve ends bond purchases from financial institutions and, as bonds in its portfolio mature, does not reinvest the repaid principal in new bonds.