Fed's Jefferson: Will keep policy in a place to be sure inflation expectations remain anchored
Federal Reserve (Fed) Vice Chairman Philip Jefferson said on Monday that there are risks to both jobs and inflation and added that it is appropriate to wait and see on rate decisions, given the the uncertainty, per Reuters.
Key takeaways
"The impact of tariffs on the Fed's mandates is top of mind."
"The risks to Fed's mandates depends on policy choices by the administration that have not been made."
"US could face a one-time increase in the price level from tariffs, need to be sure that does not become a sustained increase in inflation."
"Will keep policy in a place to be sure inflation expectations remain anchored."
"So far the labor market has been very resilient."
"It is too early to tell how the labor market will be effected by administration policies."
"There are no active conversations about changing the ample reserve operating framework."
"At a time when financial markets are changing, it is important the Fed stays focused on its mission."
"The downgrade will be treated the same as other incoming data, with focus on implications for jobs and inflation."
Market reaction
The US Dollar Index stays on the back foot following these comments and was last seen losing 0.7% on the day at 100.26.
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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