Fed’s Musalem: More data is needed to decide whether a September rate cut is warranted
St. Louis Federal Reserve President Alberto Musalem said on Friday he will need more data before deciding to support a rate cut at the September meeting, warning inflation remains above the Fed's 2% targe, per Reuters.
Key quotes
It is real that inflation is running closer to 3% than to 2%. That's real, and there is a possibility, not the base case, that there could be some persistence.
So that's one risk against the unrealized risk, not real yet, of a potential labor market deterioration.
Policy now is in the right place for a full employment labor market and inflation running above target. It's in the right place ... to be leaning against inflation.
But that's at a full employment labor market. If you happen to assess there's risk to the labor market, then that initial policy setting needs to be adjusted.
I will be updating my outlook and balance of risks all the way up and until two days, three days before the meeting.
Then I'm going to decide.
Market reaction
At the time of press, the US Dollar Index (DXY) was up 0.09% on the day at 97.80.
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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