Inflation remains too high: Fed’s Barkin favours gradual rate hikes

Inflation remains the Federal Reserve’s (Fed) biggest risk, Richmond Federal Reserve President Thomas Barkin said on Thursday. He described the policy path as straightforward, adding that raising rates gradually “makes sense.”

While Barkin said “inflation is too high,” he reported hearing no signs of either acceleration or cooling. On the labour market, he said businesses remain wary of hiring, “but are not yet firing.”

Barkin’s main points:

Economic demand remains robust, although the strength is not being felt across all sectors

Hiring remains cautious at businesses, but layoffs have not yet begun

Businesses continue to face pressure from costs

Strong earnings continue to support business investment and staff retention

Cost pressures over the past 18 months, beginning with tariffs, have been broad-based; businesses feel compelled to pass them on

Inflation is not expected to accelerate, but there are no signs of it declining at present either

With the policy direction straightforward, the question is now the pace; a gradual approach “Makes sense”

The current policy stance is roughly neutral

Much of the current strength in demand comes from AI

Although interest rates are unlikely to be the main constraint on AI, they will have some effect

For the Fed, inflation remains the biggest current risk

A “sizeable” budget deficit remains, while fiscal policy has supported the economy over the past few years

There is no view on how fiscal policy will develop after the election

Current productivity gains appear to owe more to adaptation to labour shortages that started during the pandemic than to AI

In the near term, the AI buildout has clearly added to inflation

With few employees, data centres lack natural constituencies within their host communities

Altering the number of policy-setting meetings is not a major issue

Adjusting the frequency of policy meetings offers the benefit of a better flow of data for each meeting

Fed communications need to reach a position that both the Chairman and the committee find comfortable

Banking-sector credit dynamics are currently “Reassuring”

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Today’s US Dollar Performance

The US Dollar posted its strongest performance against the Australian Dollar today. The table below sets out today’s percentage moves in the US Dollar (USD) against the major currencies listed.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.07%	-0.00%	-0.32%	0.19%	0.65%	0.21%	-0.26%
EUR	-0.07%		-0.07%	-0.41%	0.12%	0.58%	0.14%	-0.34%
GBP	0.00%	0.07%		-0.32%	0.19%	0.66%	0.22%	-0.27%
JPY	0.32%	0.41%	0.32%		0.52%	0.99%	0.52%	0.05%
CAD	-0.19%	-0.12%	-0.19%	-0.52%		0.47%	0.00%	-0.46%
AUD	-0.65%	-0.58%	-0.66%	-0.99%	-0.47%		-0.43%	-0.93%
NZD	-0.21%	-0.14%	-0.22%	-0.52%	-0.01%	0.43%		-0.45%
CHF	0.26%	0.34%	0.27%	-0.05%	0.46%	0.93%	0.45%

Percentage moves between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. To read USD (base)/JPY (quote), for example, select US Dollar on the left and follow that row across to Japanese Yen; the intersecting cell gives the percentage change.

Federal Reserve: Key Questions

The Federal Reserve’s Role and Its Effect on the US Dollar

Price stability and full employment form the Federal Reserve’s (Fed) dual mandate. As the institution responsible for US monetary policy, it relies primarily on interest-rate adjustments to pursue these objectives. If prices rise too rapidly and inflation exceeds its 2% target, the Fed increases interest rates. Higher borrowing costs across the economy make the US more attractive to international investors, strengthening the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut rates. This encourages borrowing but puts pressure on the Greenback.

Eight Meetings a Year: The Fed’s Policy Schedule

Eight times a year, the Federal Open Market Committee (FOMC) reviews economic conditions and decides monetary policy at the Federal Reserve’s (Fed) scheduled policy meetings. Twelve Fed officials attend the FOMC: the seven Board of Governors members, the president of the Federal Reserve Bank of New York, and four presidents drawn from the other eleven regional Reserve Banks. Those four serve rotating one-year terms.

Quantitative Easing (QE): How It Affects USD

To substantially expand credit flows through a stalled financial system, the Federal Reserve may deploy Quantitative Easing (QE) in extreme circumstances. This unconventional policy is used during crises or periods of exceptionally low inflation. During the Great Financial Crisis in 2008, it was the Fed’s preferred tool. The process involves printing additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar typically weakens under QE.

Quantitative Tightening (QT): Implications for the US Dollar

By reversing QE, quantitative tightening (QT) typically supports the US Dollar’s value. Under QT, the Federal Reserve halts bond purchases from financial institutions. It also refrains from reinvesting principal repaid on maturing bonds in its portfolio into new bonds.