Fed Sentiment Index drops to dovish territory ahead of key speeches
- FXStreet Fed Sentiment Index fell below 90.00 for the first time since November.
- Several Fed policymakers will be delivering speeches throughout the week.
- Markets widely expect the US central bank to cut rates twice more this year.
The Federal Reserve (Fed) decided to cut the policy rate by 25 basis-points (bps) to the range of 4%-4.25% following the September policy meeting, as widely anticipated. The revised Summary of Economic Projections (SEP), also known as the dot-plot, showed that projections imply additional 50 bps of rate cuts in 2025, 25 bps in 2026 and 25 bps in 2027.
While speaking at the post-meeting press conference, Fed Chair Jerome Powell noted that he doesn't feel the need to move quickly on rates and called the decision to lower the rates a "risk management cut." Although he noted that it's time to acknowledge that risks to the employment mandate have grown, he added that they still expect tariff-driven price increases to continue this year and next.
Following the Fed event, FXStreet Fed Sentiment Index dropped to its lowest level since early November at 82.74, reflecting a significant dovish tilt in the Fed's overall tone.
Meanwhile, newly appointed Fed policymaker Stephen Miran explained that he voted in favor of a 50 bps rate cut, arguing that the longer the policy stays restrictive, the greater the risks to the labor market. On a more neutral tone, San Francisco Fed President Mary Daly noted late Friday the Fed's move to cut rates was to try and bolster a weakening labor market, noting a pointed softening of the US economy over the past year.
FXStreet Fed Sentiment Index stays in the dovish territory at 86.23 despite recovering slightly.
NY Fed President John Williams, St. Louis Fed President Alberto Musalem, Richmond Fed President Thomas Barkin and Cleveland Fed President Beth Hammack will be delivering speeches on Monday.
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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