US Dollar Index drops after Fed maintains rates and warns on economic risks
- Fed holds rates at 4.5%, acknowledges elevated inflation and rising risks.
- Labor market remains strong; economic activity expands despite trade volatility.
- US Dollar Index falls to 99.50 as markets digest cautious Fed stance.
The Federal Reserve left its benchmark interest rate unchanged at 4.5%, in line with expectations, but struck a more cautious tone in its policy statement. While noting that the labor market remains solid and economic activity continues at a steady pace, the Fed acknowledged that inflation is still "somewhat elevated" and that both inflation and unemployment risks have risen. The Committee reaffirmed its commitment to data-dependence and reiterated that policy adjustments remain on the table should downside risks materialize. Balance sheet reduction will continue at the current pace.
The Dollar Index slid to 99.50 following the release, reflecting market concerns about the Fed's risk assessment. The central bank signaled no change in its balance sheet reduction pace, but emphasized its readiness to adjust policy if conditions worsen. Investors now await Jerome Powell's presser.
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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