Fed's Collins: Half-point rate cut was prudent given risks
Federal Reserve Bank of Boston President Susan Collins said on Wednesday that it was “prudent” for Fed officials to lower rates by a half percentage point in September as inflation eases and the economy becomes more vulnerable to shocks, per Bloomberg.
Key quotes
“I saw an initial 50-basis-point rate reduction as prudent in this context, recognizing that monetary policy remains in restrictive territory,”
“Further adjustments will likely be needed.”
"I will stress that policy is not on a pre-set path and will remain carefully data dependent, adjusting as the economy evolves.”
"The recent data, including September's unexpectedly robust jobs report, bolster my assessment that the labor market remains in a good place overall – neither too hot nor too cold,”
"It will be important to preserve the currently healthy labor market conditions," she said, noting that it would "require economic activity continuing to grow close to trend, which is my baseline outlook.”
Market reaction
The US Dollar Index (DXY) is trading 0.01% lower on the day at 102.90, as of writing.
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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