With inflation still too high, Fed’s Barkin favours gradual rate hikes

A gradual approach to interest rate increases “makes sense.” That was the view expressed on Thursday by Richmond Federal Reserve (Fed) President Thomas Barkin, who described the policy path as straightforward and identified inflation as the Fed’s foremost risk at present.

While Barkin is hearing neither an acceleration nor an easing in price pressures, he said “inflation is too high,”. On the labour market, he noted that businesses remain wary of hiring, “but are not yet firing.”

What were Barkin’s main observations?

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Although some sectors are not feeling the strength, demand across the economy remains firm

While businesses remain wary of recruitment, they have not yet begun laying off staff

Businesses continue to face pressure on costs

Strong earnings continue to encourage companies to invest and retain employees

Beginning with tariffs, cost pressures over the past 18 months have been widespread, leaving companies feeling compelled to pass them on

Inflation is not expected to pick up, but there are no signs of it declining at present either

With the policy direction straightforward, the question now is the pace; a gradual approach “Makes sense”

The current policy stance is roughly neutral

Much of the current strength in demand comes from AI

Although interest rates will have some effect on AI, they are probably not the main factor that would constrain it

For the Fed, inflation remains the leading risk at present

A “sizeable,” budget deficit accompanies fiscal policy that has supported the economy over the past few years

There is no view on how fiscal policy will develop after the election

Current productivity gains are seen as owing more to adaptation to labour shortages that started during the pandemic than to AI

In the near term, the AI infrastructure buildout has undoubtedly added to inflation

With few employees, data centres lack natural constituencies within their host communities

Altering the number of policy-setting meetings is not a major issue

Adjusting the frequency of policy meetings offers the benefit of a better flow of data ahead of each session

The Fed’s approach to communication needs to reach a position that both the Chairman and the committee find comfortable

At present, banking-sector credit dynamics are “Reassuring”

How Is the US Dollar Performing Today?

Against the Australian Dollar, the US Dollar recorded its strongest performance today. The table below sets out today’s percentage changes in the US Dollar (USD) against the major currencies listed.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.07%	-0.00%	-0.32%	0.19%	0.65%	0.21%	-0.26%
EUR	-0.07%		-0.07%	-0.41%	0.12%	0.58%	0.14%	-0.34%
GBP	0.00%	0.07%		-0.32%	0.19%	0.66%	0.22%	-0.27%
JPY	0.32%	0.41%	0.32%		0.52%	0.99%	0.52%	0.05%
CAD	-0.19%	-0.12%	-0.19%	-0.52%		0.47%	0.00%	-0.46%
AUD	-0.65%	-0.58%	-0.66%	-0.99%	-0.47%		-0.43%	-0.93%
NZD	-0.21%	-0.14%	-0.22%	-0.52%	-0.01%	0.43%		-0.45%
CHF	0.26%	0.34%	0.27%	-0.05%	0.46%	0.93%	0.45%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. To read USD (base)/JPY (quote), for instance, choose the US Dollar on the left and follow that row horizontally to the Japanese Yen column; the intersecting cell gives the percentage change for that pair.

Common Questions About the Fed

How does the Federal Reserve’s role affect the US Dollar?

Achieving price stability and promoting full employment are the two mandates of the Federal Reserve (Fed), which sets US monetary policy. Interest rate adjustments are its main means of pursuing these objectives. If prices rise too rapidly and inflation exceeds its 2% target, the Fed increases interest rates. Borrowing then becomes more expensive across the economy, while the greater appeal of the US as a destination for international investment strengthens the US Dollar (USD). Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut rates to stimulate borrowing, putting pressure on the Greenback.

What is the schedule for the Fed’s monetary policy meetings?

At eight policy meetings each year, the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) reviews the state of the economy and decides on monetary policy. Twelve Fed officials take part: the seven Board of Governors members and the president of the Federal Reserve Bank of New York, alongside four of the other eleven regional Reserve Bank presidents. These four serve rotating one-year terms.

How does Quantitative Easing (QE) work, and what does it mean for USD?

When conditions become extreme, the Federal Reserve may turn to Quantitative Easing (QE) to substantially expand credit flows through a stalled financial system. Reserved for crises or periods of exceptionally low inflation, this unconventional policy was the Fed’s preferred response during the Great Financial Crisis in 2008. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar typically weakens as a result.

How does Quantitative Tightening (QT) work, and what does it mean for the US Dollar?

Usually supportive of the US Dollar’s value, Quantitative Tightening (QT) reverses QE. Under QT, the Federal Reserve halts bond purchases from financial institutions and, as bonds in its portfolio mature, does not reinvest the principal in new bonds.