Fed’s Musalem urges near-term rate hike, citing policy that remains too loose

Further interest rate increases will be needed “again soon”, St. Louis Federal Reserve (Fed) President Alberto Musalem said on Friday. He favoured a gradual approach, in line with earlier comments from Richmond Fed President Thomas Barkin.

Musalem signalled the need for additional tightening in prepared remarks for the Shadow Open Market Committee, a gathering of economists focused on the Fed. Noting that “inflation remains elevated,” he described both current monetary policy and financial conditions as “accommodative.”

What are the key takeaways?

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

Raising rates sooner lowers risks to the broader economy

Another interest rate increase from the US central bank is due soon

A gradual pace of rate changes is preferable to abrupt adjustments

Expectations of higher policy rates are driving elevated long-term bond yields

Without central bank action, elevated inflation is unlikely to ease

Monetary policy continues to be accommodative

Financial conditions still provide accommodation

Restoring price stability is the best course of action now

Financial conditions have tightened only marginally

The broader economy and labour market remain resilient

The balance of risks continues to favour elevated inflation

Expectations for inflation are holding steady

The economy’s underlying resilience is confirmed by Q3 data

How Is the US Dollar Performing Today?

The US Dollar recorded its strongest performance against the Euro today. Its percentage moves against the listed major currencies are shown in the table below.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.21%	-0.14%	-0.17%	-0.28%	-0.07%	-0.06%	-0.12%
EUR	-0.21%		-0.34%	-0.35%	-0.47%	-0.26%	-0.27%	-0.31%
GBP	0.14%	0.34%		-0.02%	-0.13%	0.08%	0.08%	0.02%
JPY	0.17%	0.35%	0.02%		-0.10%	0.10%	0.10%	0.05%
CAD	0.28%	0.47%	0.13%	0.10%		0.20%	0.21%	0.16%
AUD	0.07%	0.26%	-0.08%	-0.10%	-0.20%		0.00%	-0.04%
NZD	0.06%	0.27%	-0.08%	-0.10%	-0.21%	-0.00%		-0.04%
CHF	0.12%	0.31%	-0.02%	-0.05%	-0.16%	0.04%	0.04%

Percentage movements between the 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 instance, choose the US Dollar on the left and follow that row horizontally to the Japanese Yen column; the intersecting cell shows the pair’s percentage change.

Understanding the Fed: FAQs

How does the Federal Reserve’s role influence the US Dollar?

The Federal Reserve (Fed) sets US monetary policy with a dual mandate of maintaining price stability and promoting full employment. Changes to interest rates are its main means of meeting these objectives. If prices rise too rapidly and inflation exceeds the Fed’s 2% target, the central bank increases interest rates. Borrowing then becomes more expensive across the economy. By making the US a more attractive destination for international investors’ funds, higher rates strengthen the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut interest rates. Such cuts encourage borrowing but put pressure on the Greenback.

How frequently does the Fed meet to decide monetary policy?

At the Federal Reserve’s eight policy meetings each year, the Federal Open Market Committee (FOMC) reviews the state of the economy and decides monetary policy. Twelve Fed officials participate in the FOMC: the Board of Governors’ seven members, the president of the Federal Reserve Bank of New York and four of the other eleven regional Reserve Bank presidents. The latter four serve rotating one-year terms.

How does Quantitative Easing (QE) work, and what does it mean for USD?

When conditions become extreme, the Federal Reserve may turn to Quantitative Easing (QE) to sharply expand credit flows through a stalled financial system. This unconventional policy is used in crises or periods of exceptionally low inflation. During the Great Financial Crisis in 2008, it was the Fed’s preferred policy tool. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar typically weakens as a result.

How does Quantitative Tightening (QT) work, and what does it mean for the US Dollar?

As the opposite of QE, Quantitative Tightening (QT) involves the Federal Reserve halting bond purchases from financial institutions. It also refrains from reinvesting the principal received when bonds in its portfolio mature into new bonds. This process generally supports the US Dollar’s value.