Fed's Williams says inflation is still too high

Inflation remains too high and will require central bank action over time to return to 2%, New York Federal Reserve (Fed) President John Williams said on Friday.

Highlights from the remarks

Economy resilient and growth robust.

US economy strengthening but not overheating.

Inflation remains too elevated.

Inflation remains stubbornly persistent and elevated.

Central bank has maintained consistent pace of gathering data.

Central bank will have to act over time to bring inflation back to 2%.

Central bank still has work to do to reach right monetary policy stance.

Monetary policy aims at inflation, not price levels.

Attempting to reduce overall price levels may cause poor economic conditions. How are markets responding?

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

Does US economic resilience justify a hawkish stance as Williams warns of high inflation?

A moderately hawkish policy signal emerged from Fed’s Williams, whose FXS Speechtracker score of 7/10 exceeded the historical average of 6.1/10. The reading points to a firmer stance than the established baseline. Describing the US economy as “resilient” and “robust”, while calling inflation “stubbornly persistent” and “too elevated”, suggests that the Federal Reserve regards continued economic strength as grounds for retaining a tightening bias. Williams also drew a distinction between targeting inflation and targeting overall price levels, cautioning that attempts to lower prices could harm economic conditions. His remarks therefore underline the objective of returning inflation to 2% over time, rather than deliberately bringing about outright deflation.

A modest easing in perceived hawkishness was evident in the FXS Fed Sentiment Index, which fell by 0.08 points to 147.47, even as the FXS Speechtracker captured a still-robust tone. The Federal Reserve nevertheless remains firmly hawkish, with the index substantially above the neutral 100 mark. At the margin, however, the decline suggests a more measured approach to further policy tightening that would support the Dollar.

How is the Dollar trading?

The US Dollar Index (DXY) is up 0.05%, trading at around 103.23 at the time of writing.

US Dollar: common questions

What role does the US Dollar play?

Alongside its status as the official currency of the United States of America, the US Dollar (USD) serves as the ‘de facto’ currency in a significant number of other countries, circulating together with local banknotes. No other currency is traded more widely: according to 2022 data, it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. The USD replaced the British Pound as the world’s reserve currency after the Second World War. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971, when the Gold Standard was abandoned.

Why do Federal Reserve decisions affect the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single biggest influence on the US Dollar’s value. Achieving price stability, or controlling inflation, and promoting full employment are the Fed’s two mandates. Adjustments to interest rates are its main means of pursuing these goals. The Fed raises rates when prices climb too rapidly and inflation exceeds its 2% target, helping to strengthen the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

Printing additional Dollars and introducing quantitative easing (QE) are also options available to the Federal Reserve in extreme circumstances. Through QE, the Fed significantly expands credit flows within a stalled financial system. This unconventional policy is deployed when credit dries up because banks, fearing counterparty defaults, refuse to lend to one another. It serves as a last resort if interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose this tool to tackle the credit crunch. The process entails printing more Dollars to purchase US government bonds, mainly from financial institutions. The US Dollar typically weakens as a result of QE.

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

In quantitative tightening (QT), the reverse of QE, the Federal Reserve ceases purchasing bonds from financial institutions. It also refrains from reinvesting the principal repaid on its maturing bond holdings in further purchases. This process generally supports the US Dollar.