Federal Reserve (Fed) Board of Governors member Stephan Miran said on Friday that monetary policy has passively tightened, adding that central bank can afford to have lower interest rates.
Key quotes
Federal Reserve is one of the biggest risks to growth.
Monetary policy has passively tightened.
We are misunderstanding just how tight monetary policy is.
Inflation looking through biases is very close to target.
There is some slack in the labor market; there is room for monetary policy to help.
We can afford to have lower interest rates.
I do not think we have an inflation problem, prices are roughly stable.
Not worried about inflation unless I see a strong uptick in the rental market.
It makes sense to continue to try to support the labor market with looser monetary policy.
If supply is increasing to meet demand, you can have high growth without inflation.
Natural rate of unemployment is likely 4%.
We have not seen significant tariff effects in inflation.
US fiscal outlook is improving and US economic growth is outperforming, which reinforces US dollar reserve status.
Market reaction
At the time of writing, the US Dollar Index (DXY) is trading around 97.00, up 0.10% on the day.
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.