Fed’s Hammack favours gradual rate hikes as she says inflation is getting worse

Concern over persistent inflation shortfalls contrasted with a positive assessment of employment from Cleveland Federal Reserve (Fed) President Beth Hammack on Thursday. While acknowledging the Fed’s good work on the “job side of the mandate,” she said it “has been missing on the inflation mandate for years.”

Although the latest data indicate that inflation is heading in the wrong direction, Hammack favoured gradual interest rate adjustments. She also acknowledged that the Fed “needs to move rates higher to get to restrictive rate policy.”

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Main points from Hammack’s remarks:

On the employment side of its mandate, the Fed is performing very well.

For years, the Fed has fallen short of its inflation mandate.

The latest inflation readings point to movement in the wrong direction.

High inflation is being fuelled in part by genuine demand pressures.

To bring inflation down, we need to shift to restrictive monetary policy.

There is concern that an inflationary mindset could take hold in the economy.

Every FOMC meeting is approached with an open mind.

Smaller and more consistent Fed rate adjustments are preferred.

To make interest rate policy restrictive, the Fed needs to raise rates further.

The Fed is not considered to be behind the curve, but more aggressive action would be considered if it were.

Raising rates in smaller, steadier steps allows the economy time to adapt.

A widening of price pressures is evident in recent inflation figures.

The labour market is stagnant; its lack of dynamism means it cannot be described as healthy.

Questions about the Fed

How does the Federal Reserve’s role influence the US Dollar?

Achieving price stability and promoting full employment are the Federal Reserve’s (Fed) two mandates. As the institution responsible for US monetary policy, it relies primarily on interest rate adjustments to meet these objectives. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, the central bank raises rates. Higher borrowing costs across the economy make the US a more appealing destination for international investment, strengthening the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut rates to stimulate borrowing. Such a move puts pressure on the Greenback.

What is the schedule for the Fed’s monetary policy meetings?

At eight policy meetings each year, the Federal Open Market Committee (FOMC) reviews the state of the economy and decides monetary policy for the Federal Reserve (Fed). Twelve Fed officials participate: the Board of Governors’ seven members, the president of the Federal Reserve Bank of New York and four presidents drawn from the other eleven regional Reserve Banks. Those four serve rotating one-year terms.

How does Quantitative Easing (QE) work, and what does it mean for USD?

When financial conditions become extreme, the Federal Reserve may turn to Quantitative Easing (QE) to substantially expand the flow of credit through a stalled financial system. This unconventional tool is deployed in crises or periods of exceptionally low inflation, and was the Fed’s preferred response during the Great Financial Crisis in 2008. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar generally weakens as a result.

Why does Quantitative Tightening (QT) typically support the US Dollar?

By reversing QE, quantitative tightening (QT) generally supports the US Dollar’s value. Under this process, the Federal Reserve halts bond purchases from financial institutions and, as bonds in its portfolio mature, does not use the principal repaid to buy new bonds.