Fed’s Barkin flags inflation as main risk, suggests cautious approach to rates

Risks to the Fed’s dual mandate “lie on the inflation side”, Richmond Federal Reserve (Fed) President Thomas Barkin said on Monday. He described the direction of monetary policy as “straightforward” but said policymakers should proceed “with care.”

In prepared remarks for the Greater Greer Chamber of Commerce in South Carolina, Barkin described the US economy as “remarkably stable,” with demand and broad-based cost increases keeping inflation under pressure. Firms, he added, say they are “trying to pass on higher costs.”

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

Main points:

Inflation is the risk side of the US central bank’s mandate

Monetary policy’s direction is ‘straightforward’, but proceeding 'with care’ is best

‘Remarkably stable’ conditions characterise the US economy

Prices face upward pressure from resilient demand and broad-based cost increases.

Passing on higher costs is what firms say they will be trying to do

'Remarkable' earnings accompany strong business performance:

Healthy loan pipelines and demand well beyond artificial intelligence are reported by bankers

Layoff activity stays subdued

Reports I’m hearing point to broad-based cost pressures.

Despite 'bleak' consumer sentiment, spending continues, supported by a resilient job market

Today’s US Dollar Performance

The US Dollar (USD) performed most strongly against the Swiss Franc today. Its percentage changes against the major currencies listed are shown in the table below.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.54%	-0.52%	-0.30%	0.06%	-0.71%	-1.34%	0.12%
EUR	0.54%		0.02%	0.27%	0.60%	-0.17%	-0.80%	0.66%
GBP	0.52%	-0.02%		0.25%	0.57%	-0.20%	-0.83%	0.64%
JPY	0.30%	-0.27%	-0.25%		0.35%	-0.42%	-1.05%	0.42%
CAD	-0.06%	-0.60%	-0.57%	-0.35%		-0.77%	-1.39%	0.07%
AUD	0.71%	0.17%	0.20%	0.42%	0.77%		-0.63%	0.84%
NZD	1.34%	0.80%	0.83%	1.05%	1.39%	0.63%		1.48%
CHF	-0.12%	-0.66%	-0.64%	-0.42%	-0.07%	-0.84%	-1.48%

Percentage movements between 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, selecting the US Dollar on the left and following its row across to the Japanese Yen gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.

Federal Reserve FAQs

The Federal Reserve’s Role and Its Effect on the US Dollar

Price stability and 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 pursue these goals. If prices increase too rapidly and inflation exceeds its 2% target, the Fed raises rates. Borrowing then becomes more expensive across the economy. Higher rates make the US more attractive to international investors allocating funds, 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 cuts weigh on the Greenback.

Eight Policy Meetings a Year: The Fed’s Schedule

Economic conditions are reviewed and monetary policy decisions taken by the Federal Open Market Committee (FOMC) at the Federal Reserve’s (Fed) eight policy meetings each year. Twelve Fed officials attend the FOMC: the Board of Governors’ seven members, the president of the Federal Reserve Bank of New York and four presidents drawn from the remaining eleven regional Reserve Banks. Those four serve rotating one-year terms.

Quantitative Easing (QE): How It Affects USD

A substantial expansion in credit flowing through a stalled financial system is the purpose of Quantitative Easing (QE), a policy the Federal Reserve may adopt in extreme circumstances. This unconventional measure is deployed during crises or periods of exceptionally low inflation. During the Great Financial Crisis in 2008, it was the Fed’s preferred policy tool. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar typically weakens as a result.

Quantitative Tightening (QT): Implications for the US Dollar

Reversing QE, quantitative tightening (QT) sees the Federal Reserve halt bond purchases from financial institutions. It also refrains from reinvesting the principal repaid on maturing bonds in its portfolio into new bonds. The process generally supports the US Dollar’s value.