Fed's Williams: Interest rates to come down gradually as inflation eases
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Fed's Williams: Interest rates to come down gradually as inflation eases

In an interview with Fox Business, New York Federal Reserve President John Williams noted that recent inflation data have been encouraging and added that he expects inflation to continue to come down, per Reuters.

Fed officials in no rush to cut rates, looking for further progress in inflation.

Key takeaways

"Rate cut path depends on data."

"The US economy is doing well, it's in better balance."

"Fed decisions will depend on the economy."

"Things are moving in the right direction for monetary policy."

"Expecting interest rates to come down gradually as inflation eases."

"Politics will not influence Fed rate decisions."

"We have a very strong economy and incomes are growing."

"Interest rates will come down over next few years."

"3% inflation is not the new norm, Fed will get inflation to 2%."

"We still have a very strong labor market with some hiring slowing."

Market reaction

The US Dollar struggles to gather strength following these comments. At the time of press, the US Dollar Index was unchanged on the day at 105.35.

Fed FAQs

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.

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.

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.

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.