Fed's Williams says wants to avoid inflation becoming highly persistent
Federal Reserve Bank of New York President John Williams said on Wednesday that he wants to avoid inflation becoming highly persistent because that could become permanent.
Key quotes
Important that inflation expectations are well anchored.
Want to avoid inflation becoming highly persistent because that could become permanent.
Way to avoid that is to respond relatively strongly when inflation begins to deviate from the target.
Misperceptions about ‘r star’ can lead to long-lasting deviations.
We have to be very aware that inflation expectations could shift in any way that could be detrimental.
You want the whole curve of inflation expectations to be well-behaved.
It’s not to say inflation expectations shouldn’t move, it means they should move in a way that emerges back to target within several years.
Market reaction
The US Dollar Index (DXY) is trading 0.10% lower on the day at 99.50, as of writing.
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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