Fed holds steady, pushes back on cuts as inflation risks linger
The Federal Reserve (Fed) left its policy rate unchanged at 3.50% to 3.75%, but the overall message from both the statement and Chair Jerome Powell’s press conference leans firmly towards patience rather than any imminent pivot to easing.
The economic backdrop remains broadly supportive, with activity still expanding at a solid pace and consumer spending holding up, while the labour market is cooling but not deteriorating sharply. Inflation, it seems, is sticking around longer than anticipated. Recent developments, especially in energy and tariffs, are throwing a wrench into the disinflationary efforts, and we're likely to see price pressures increase in the near future.
The latest projections back this up, as inflation forecasts have been adjusted upward, and there's a noticeable shift among policymakers, signalling fewer rate cuts, even if the median path stays the same.
Powell echoed that cautious stance, stressing that the Fed is not prepared to look through inflation lightly and that renewed, convincing progress, especially in goods, is required before easing can be considered. At the same time, he emphasised that policy is already at or slightly above neutral and that hikes are not the base case, leaving the Fed with a genuinely two-sided, but clearly asymmetric, reaction function.
To sum up: the Fed stays on hold but signals higher-for-longer, with the bar for rate cuts raised and inflation risks still firmly in focus.
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.
Artigos Recomendados
