Fed's Musalem: More rate cuts likely but data will drive policy choices

Federal Reserve Bank of St. Louis President Alberto Musalem said on Monday that he supports additional interest rate cuts as the economy moves forward. Musalem further stated that performance will determine the path of monetary policy, according to Reuters.

Key quotes

Further gradual reductions in the policy rate will likely be appropriate over time.

I will not prejudge the size or timing of future adjustments to policy.

Personal rate outlook is above the Fed’s median view.

Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late.

That is because sticky or higher inflation would pose a threat to the Fed's credibility and to future employment and economic activity.

Supported Fed’s decision last month to cut rates by 50 basis points.

It is possible that inflation will cease to converge" on the 2% target.

But I believe the risks that inflation becomes stuck above 2% or rises from here have diminished.

Cooler job market is still consistent with a strong economy.

Financial conditions remain supportive of growth.

Some economic activity is slowed by rate policy, and election uncertainty.

The September jobs report was very strong.

The labor market is strong; it is healthy.

There is no emergency in the job market right now.

The jobs report didn't cause a change in outlook.

The current policy path is still appropriate despite the jobs data.

I don't pay much attention to the market pricing of the Fed outlook.

Won't prejudge the outcome of coming Fed meetings.

Fed's dot plot is helpful to understand Fed actions.

Market reaction

The US Dollar Index (DXY) is trading 0.03% lower on the day at 102.45, 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.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.