Powell speech: We can be more cautious in reducing rates
Federal Reserve Chairman Jerome Powell explains the decision to cut the policy rate, federal funds rate, by 25 basis points to the range of 4.25%-4.5% after the December meeting and responds to questions in the post-meeting press conference.
Key quotes
"Squarely focused on two goals."
"The economy is strong, labor market remains solid."
"Inflation much closer to the 2% goal."
"Consumer spending resilient, investment in equipment has strengthened."
"Housing activity has been weak."
"Improving supply has supported strong us economic performance."
"Wage growth has eased."
"Labor market not a source of inflation pressures."
"Total PCE probably rose 2.5% in 12 months ending in November."
"Core PCE prices probably rose 2.8% in November."
"Inflation expectations remain well-anchored."
"Risks to achieving goals roughly in balance."
"Attentive to risks on both sides."
"We can be more cautious going forward, can be more cautious in reducing rates."
"Reducing policy restraint too slowly could unduly weaken economy, employment."
"Policymaker projections for policy rate are higher for next year, consistent with higher inflation."
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.