Fed's Williams: Inflation remains too elevated
New York Federal Reserve (Fed) President John Williams said on Friday that inflation remains too elevated, adding that the central bank will have to act over time to bring inflation back to 2%.
Key quotes
Economy resilient and growth robust.
US economy strengthening but not overheating.
Inflation remains too elevated.
Inflation remains stubbornly persistent and elevated.
Central bank has maintained consistent pace of gathering data.
Central bank will have to act over time to bring inflation back to 2%.
Central bank still has work to do to reach right monetary policy stance.
Monetary policy aims at inflation, not price levels.
Attempting to reduce overall price levels may cause poor economic conditions. Market reaction
Williams flags resilient US economy but warns inflation still too high
Fed’s Williams delivered a moderately hawkish message, with a 7/10 FXS Speechtracker score standing above the 6.1/10 historical average and underscoring a firmer policy tone relative to the established baseline. The emphasis on a “resilient” and “robust” US economy, alongside “stubbornly persistent” and “too elevated” inflation, signals that the Federal Reserve sees ongoing strength that justifies keeping a tightening bias in place. By stressing that monetary policy targets inflation rather than overall price levels and warning that trying to push prices down could damage economic conditions, the speech reinforces a focus on bringing inflation back to 2% over time rather than engineering outright deflation.
The FXS Fed Sentiment Index slipped by 0.08 points to 147.47, indicating a slight pullback in perceived hawkishness despite the still-robust tone captured by the FXS Speechtracker. With the index well above the neutral 100 mark, the Federal Reserve remains firmly in hawkish territory, even as the marginal decline hints at a more measured approach to future Dollar-supportive policy tightening.
Market reaction
At press time, the US Dollar Index (DXY) trades 0.05% higher at around 103.23.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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