Fed's Musalem: Likely most of tariff impact on inflation will fade

Key takeaways

"Bankers report that funding pressures have diminished, credit quality is good."

"Companies continue to report a shortage of skilled labor."

"Firms remain cautious on capital spending and hiring."

"Companies are using different strategies to adapt to tariffs, including cost-cutting and negotiating with suppliers."

"Companies are not yet resorting to layoffs to reduce costs."

"Companies that are most dependent on imports are passing along costs; those closer to consumers are less likely to raise prices so far."

"The Fed is now missing on its inflation target but not missing on its employment mandate; labor market around full employment."

"Looking ahead there is a risk that the Fed may miss on both inflation and employment, with downside risk to jobs."

"Likely that most of the impact of tariffs on inflation will fade."

"But there is a reasonable probability that there may be some inflation persistence."

"Labor market is in balance, but economic activity has been weaker and that poses risks to jobs."

"The Fed is balancing risks to both sides of its mandate right now."

"Data integrity is critically important to the economy."

Market reaction

These comments received a hawkish/neutral score of 6.2 from FXStreet Fed Speech Tracker. Currently, FXStreet Fed Sentiment Index stays near 111.00 after having retreated from 121.00 reached immediately after the Fed's policy announcement after the July meeting.

Meanwhile, the US Dollar Index clings to small daily gains at around 98.20.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.

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