Federal Reserve Bank of San Francisco President Mary Daly said on Wednesday that she “fully” supported the Fed’s half of a percentage-point interest-rate cut last month. Daly further stated that one or two more rate cuts this year are likely if the economy evolves as she expects, per Reuters.
Key quotes
Fully supported half-point rate cut.
Quite confident we are on path to 2% inflation.
We are at full employment.
With policy rate steady, real rate was rising.
Rising real rate was a recipe for overtightening and injuring the labor market.
Rate cut was a recalibration, to rightsize rates for the economy.
Size of September rate cut does not say anything about pace or size of next cuts.
Two or one more cut this year is what is likely.
We will watch data, monitor labor market and inflation.
We will make more or fewer adjustments to rates as necessary.
I do not want to see further slowing in the labor market.
Most firms are seeing a hybrid work situation, not a return to a 5-day-in-the-office situation.
I am not worried about accelerating inflation.
I was more worried about injuring the labor market.
Will watch inflation data carefully.
Little evidence that balance sheet expansion has much of a direct effect on inflation.
We are coming near the inflation target but not satisfied, no victory declared.
Balance sheet is coming down to more normalised levels.
Market reaction
The US Dollar Index (DXY) is trading 0.01% lower on the day at 102.90, as of writing.
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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