According to the Financial Times, Mary Daly, president of the Federal Reserve Bank of San Francisco, said the U.S. central bank must take a gradual approach to reducing borrowing costs.
Important quotes
Daly calls for “prudent” approach to cutting interest rates
Rejects economists’ concerns that the U.S. economy is heading for a sharp slowdown that justifies rapid interest rate cuts.
The step-by-step approach is neither weak nor slow nor lagging behind, but merely cautious.
After the first quarter of this year, inflation is slowly approaching the two percent mark.
The Fed did not want to tighten monetary policy too much in view of the weakening economy.
There is no need for a dramatic response to the weakening labor market.
Market reaction
The US dollar index (DXY) is trading 0.03% higher than the previous day at 102.45 at the time of writing.
Frequently Asked Questions about the Fed
Monetary policy in the U.S. is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and to promote full employment. Its main tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases the cost of borrowing across the economy. This leads to a stronger U.S. dollar (USD) because it makes the U.S. 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 can cut interest rates to encourage borrowing, which weighs on the greenback.
The Federal Reserve (Fed) holds eight meetings a year at which the Federal Open Market Committee (FOMC) assesses the economic situation and makes monetary policy decisions. The FOMC is attended by twelve Fed representatives – the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the remaining eleven presidents of the regional reserve banks, who serve a rotating one-year term.
In extreme situations, the Federal Reserve may resort to a policy called quantitative easing (QE). QE is the process by which the Fed significantly 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-quality bonds from financial institutions. QE usually weakens the U.S. 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 capital from the maturing bonds to buy new bonds. This usually has a positive effect on the value of the U.S. dollar.
