Fed's Williams: Price stability is foundational for Fed
New York Federal Reserve Bank (Fed) President John Williams said on Friday that price stability is foundational for the Fed, per Reuters.
Key takeaways
"Important to have well-anchored inflation expectations."
"We are focused on keeping inflation as close to target as possible."
"Inflation will come back to 2%."
"Key to think through scenarios in time of uncertainty."
"Expecting growth to slow considerably, inflation and unemployment to be higher."
"Factors keeping long run neutral rate low still in place."
"Still seeing long run neutral rate as quite low."
"Markets are very focused on downside risks right now."
"Markets appear convinced fed will get inflation back to 2%."
"Now is an inflection point between hard and soft data."
"Hard data is telling us economy is good right now."
Market reaction
The US Dollar stays under modest bearish pressure in the American session on Friday. At the time of press, the US Dollar Index was down 0.3% on the day at 100.35.
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.
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