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Fed’s Goolsbee warns high inflation is no one-off as economy runs too hot
Tuesday’s Consumer Price Index (CPI) “wasn’t a one-off,” Chicago Federal Reserve (Fed) President Austan Goolsbee said in an interview with Yahoo! Finance, noting that inflation has been “well above target”.
With inflation putting the Fed in a “tough spot”, Goolsbee also said the central bank should be “mindful” of indications that the economy is overheating.
Main points from Goolsbee’s remarks:
Inflation has remained substantially above target
A 'sober-minded' assessment of inflation figures and the Fed’s response is warranted
The strong inflation reading was not an isolated event
Investment in AI appears to act as a form of stimulus.
We are gradually approaching a position that has historically been difficult for the Fed
The Fed should watch for indications of overheating across the economy
US Dollar Outperforms Australian Dollar Today
Today’s percentage moves in the US Dollar (USD) against the major currencies listed appear in the table below. The dollar’s strongest performance was against the Australian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.26% | 0.30% | 0.08% | 0.05% | 0.59% | 0.32% | 0.18% | |
| EUR | -0.26% | 0.04% | -0.16% | -0.22% | 0.33% | 0.05% | -0.08% | |
| GBP | -0.30% | -0.04% | -0.21% | -0.26% | 0.30% | 0.02% | -0.12% | |
| JPY | -0.08% | 0.16% | 0.21% | -0.03% | 0.52% | 0.23% | 0.11% | |
| CAD | -0.05% | 0.22% | 0.26% | 0.03% | 0.55% | 0.26% | 0.13% | |
| AUD | -0.59% | -0.33% | -0.30% | -0.52% | -0.55% | -0.27% | -0.42% | |
| NZD | -0.32% | -0.05% | -0.02% | -0.23% | -0.26% | 0.27% | -0.11% | |
| CHF | -0.18% | 0.08% | 0.12% | -0.11% | -0.13% | 0.42% | 0.11% |
Percentage movements between the major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. For instance, choosing the US Dollar on the left and following that row across to the Japanese Yen gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.
The Fed Explained
The Federal Reserve (Fed) sets US monetary policy with a dual mandate: maintaining price stability and promoting full employment. Adjustments to interest rates are its main means of pursuing these objectives. If prices rise too rapidly and inflation exceeds the Fed’s 2% target, the central bank increases interest rates. Borrowing then becomes more expensive across the economy. By making the US a more appealing destination for international investors’ funds, higher rates strengthen the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut rates to stimulate borrowing, putting downward pressure on the dollar.
At the Federal Reserve’s (Fed) eight annual policy meetings, the Federal Open Market Committee (FOMC) reviews the state of the economy and decides on monetary policy. Twelve Fed officials take part: the seven Board of Governors members, the president of the Federal Reserve Bank of New York and four of the other eleven regional Reserve Bank presidents. Those four presidents serve rotating one-year terms.
When conditions become extreme, the Federal Reserve may turn to Quantitative Easing (QE), a policy that substantially expands the flow of credit through a stalled financial system. This unconventional measure is deployed in crises or periods of extremely low inflation. During the Great Financial Crisis in 2008, it was the Fed’s preferred response. Under QE, the central bank prints additional dollars to purchase high-grade bonds from financial institutions. The policy generally weakens the US Dollar.
Reversing QE, quantitative tightening (QT) involves the Federal Reserve halting bond purchases from financial institutions. It also refrains from reinvesting the principal repaid as its existing bonds mature in purchases of new bonds. This process generally supports the value of the US Dollar.
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