Hot inflation no fluke: Fed’s Goolsbee warns as economy overheats

Inflation has been “well above target,” Chicago Federal Reserve (Fed) President Austan Goolsbee told Yahoo! Finance. In the interview, he said Tuesday’s Consumer Price Index (CPI) “wasn’t a one-off.”

Describing the Fed’s inflation challenge as a “tough spot”, Goolsbee added that policymakers should be “mindful” of indications that the economy is overheating.

Main points:

Inflation has remained far above target

Inflation figures and the Fed’s response warrant a 'sober-minded' assessment

The elevated inflation reading was not an isolated occurrence

Investment in AI appears to be a type of stimulus.

We are edging towards a position that has historically been difficult for the Fed

Signs of overheating across the economy should command the Fed’s attention

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

US Dollar: Today’s Currency Moves

Against the Australian Dollar, the US Dollar (USD) recorded its strongest performance today. The table below sets out its percentage moves against the major currencies listed.

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

Fed: Key Questions Answered

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

The Federal Reserve (Fed) sets US monetary policy with two objectives: stable prices and full employment. Interest-rate adjustments are its main means of meeting those objectives. If prices climb too rapidly and inflation exceeds its 2% target, the Fed increases interest rates. Borrowing then becomes more expensive across the economy. Higher rates strengthen the US Dollar (USD) by making the US a more appealing destination for international investors’ funds. Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut interest rates. This encourages borrowing but puts downward pressure on the Greenback.

Eight Fed Policy Meetings Each Year

At the Federal Reserve’s (Fed) eight annual policy meetings, the Federal Open Market Committee (FOMC) reviews the economy and decides monetary policy. Twelve Fed officials attend the FOMC: all seven members of the Board of Governors, 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.

Quantitative Easing (QE): Implications for USD

Faced with extreme conditions, the Federal Reserve may turn to Quantitative Easing (QE), a policy that sharply expands credit flows through a stalled financial system. 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 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

To reverse QE through Quantitative Tightening (QT), the Federal Reserve ceases bond purchases from financial institutions. It also allows its existing bonds to mature without reinvesting the principal in new bonds. The process generally supports the US Dollar’s value.