Fed's Kugler: Higher than expected tariffs likely to send prices higher
Federal Reserve Board Governor Adriana Kugler said late Tuesday that with US import tariffs significantly larger than expected and likely to put upward pressure on prices, the Fed ought to keep short-term borrowing costs unchanged until inflation risks recede, per Reuters.
Key quotes
Tariff increases are significantly larger than previously expected.
Economic effects of tariffs and uncertainty likely to be larger than anticipated.
Supports holding policy rate steady as long as upside risks to inflation continue, while economic activity and employment remain stable.
Fed policy well-positioned for macroeconomic changes.
If financial markets tighten persistently, it could weigh on future growth.
Especially monitoring upside risks on inflation, downside risks on employment.
Inflation progress has slowed, remains above 2% goal.
Labor market solid, broadly in balance.
Longer-term inflation expectations are largely well-anchored, hopes they remain so.
First-quarter GDP may show moderation vs. 2024, but some front-loading of purchases to avoid tariffs.
Tariffs likely to put upward pressure on prices.
Market reaction
At the time of writing, the US Dollar Index (DXY) is trading 0.76% higher on the day to trade at 99.73.
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.