Powell speech: Revisions to Fed communications are being considered
While delivering his prepared remarks on Framework Review at the Thomas Laubach Research Conference on Thursday, Federal Reserve (Fed) Chairman Jerome Powell said that officials agree the strategic language around both shortfalls of employment and average inflation need to be reconsidered.
Key takeaways
"Fed is undertaking a two-day review of revisions to its framework adopted in 2020."
"Framework needs to be robust to many circumstances, including a world where supply shocks may be more frequent and persistent."
"April PCE likely around 2.2%."
"Idea of a moderate overshoot of inflation following weakness became irrelevant given the levels inflation reached."
"Revisions to Fed communications are also being considered."
"Zero-lower bound still a risk and should be addressed in the framework, though it is no longer a base case given current level of policy rates."
"Certain aspects of the Fed's approach are permanent, such as the focus on inflation expectations."
Market reaction
These comments don't seem to be having a noticeable impact on the US Dollar's valuation. At the time of press, the USD Index was down 0.23% on the day at 100.78.
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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