Fed’s Powell discusses monetary policy amid increasing bets for further easing
- Comments from Fed Chief Jerome Powell will be closely followed midweek to get clues about the interest rate outlook.
- The Fed is seen reducing its interest rates by a quarter point at this month’s meeting.
- The US labour market takes centre stage this week, with NFP due on Friday.
Federal Reserve Chair Jerome Powell is set to participate in a moderated discussion on the economic outlook on Wednesday at the New York Times DealBook Summit in New York. Investors will closely monitor his remarks, eager for any signals about future monetary policy.
The event comes at a time when markets largely expect the Fed to cut its policy rate by another 25 basis points during its December 17-18 meeting. However, this expectation lost some momentum following Powell's remarks at an event in Dallas on November 14.
During his Dallas speech, Powell indicated that the Fed could take its time before making further rate cuts. He pointed to steady economic growth, a strong labour market, and inflation remaining above the Fed's 2% target as reasons for a cautious approach. His comments aligned with the views of FOMC Governor Michelle Bowman, who has consistently advocated for a prudent stance on rate adjustments.
As of now, the probability of a 25-basis-point rate cut this month stands at approximately 75%, according to the CME Group’s FedWatch Tool. However, investors anticipate no more than 75 basis points of easing over the next 12 months.
The Fed and Trump: A collision course ahead?
The return of former President Donald Trump to the White House has raised concerns about renewed inflationary pressures. His proposed policies could significantly alter the economic landscape, featuring looser fiscal measures, the reintroduction of tariffs on exports from China, Europe, Mexico, Canada, and the BRICS nations, as well as stricter immigration policies.
In fact, a new chapter in the US-China trade war has already begun. China recently announced a ban on exporting gallium, germanium, and antimony to the US – minerals critical for military technologies. This move came just one day after Washington introduced new restrictions targeting China’s semiconductor industry.
While Powell has repeatedly declined to speculate on the economic impacts of potential policies under a renewed Trump administration, it's likely that any resurgence in inflationary pressures could lead the Fed to pause or even halt its current easing cycle.
Amid these developments, the US Dollar (USD) surged in October and November before entering a period of consolidation/correction. However, this pause should be temporary, leaving the bullish outlook for 2025 unchanged.
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.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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