Fed’s Bostic: Inflation is expected to decline but warns Fed to be cautious

Federal Reserve Bank of Atlanta President Raphael Bostic said on Tuesday that Fed officials should be cautious with policy decisions given uneven progress on lowering inflation and err on the side of keeping interest rates elevated to achieve their price stability goals, per Bloomberg.

Key quotes

Given that kind of bumpiness in the measures, I think that will call for our policy approach to be more cautious.

I want to make sure we get the right signal, and make sure that our policy is calibrated to that right signal. And if we’ve got to err, I would err on the upside.

I would want to make sure — for sure — that inflation gets to 2%, which means we may have to keep our policy rate higher longer than people might expect.

Inflation trends might show periods of stalling or more aggressive movement, reflecting variability in the data.

Ensuring policy aligns with reliable signals, even amid variability, is a key focus.

Preference to err on maintaining higher rates longer to ensure inflation reaches the 2% target.

Policy rate reductions may be slower or delayed to ensure consistent progress toward inflation goals.

Rates will likely remain elevated longer than originally anticipated to achieve the inflation target.

Market reaction

The US Dollar Index (DXY) is trading 0.02% lower on the day at 108.68, as of writing.

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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