As inflation spreads, is the Fed set for more aggressive hikes? Goolsbee warns

To safeguard its credibility, the Fed “definitely has work to do”, according to Chicago Federal Reserve (Fed) President Austan Goolsbee. He said inflation had spread to categories “where prices are not being driven by energy”.

Speaking to CNBC on Friday, Goolsbee said: “Inflation is rising and proving far more persistent than expected when it was just a matter of supply shocks.” He also indicated that, “to the extent data” point to worsening inflation, the Fed is being pushed towards a more aggressive approach to interest rates.

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

What are the key points?

Speaking on CNBC, says inflation now extends to categories in which energy is not driving prices

Caution is needed when evaluating the labour market’s effect on inflation, as wages lag behind price pressures

If demand is overheating, inflation cannot be looked through; data centre expansion is driving prices higher

Price growth is accelerating and has proved much more persistent than anticipated when supply shocks alone were the issue

To preserve its credibility, the Fed “Definitely has work to do”

A rapid change in services inflation and rising healthcare costs does not seem likely

Like Bessent, the Fed is seeking to understand how persistent inflation will be

Even a sharp fall in oil prices would leave refining capacity “Problematic”, keeping diesel and jet fuel prices high

A more aggressive Fed response would follow insofar as the data indicate worsening inflation

With the Fed currently off track to achieve 2%, the central bank must address the shortfall and ensure demand does not overheat

How Is The US Dollar Performing Today?

The US Dollar recorded its strongest performance against the Swiss Franc today. Its percentage movements against the major currencies listed are set out in the table below.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.08%	0.07%	0.02%	-0.06%	0.26%	0.25%	0.35%
EUR	-0.08%		-0.01%	-0.04%	-0.14%	0.18%	0.17%	0.27%
GBP	-0.07%	0.00%		-0.04%	-0.13%	0.19%	0.18%	0.28%
JPY	-0.02%	0.04%	0.04%		-0.09%	0.23%	0.21%	0.32%
CAD	0.06%	0.14%	0.13%	0.09%		0.32%	0.31%	0.41%
AUD	-0.26%	-0.18%	-0.19%	-0.23%	-0.32%		-0.01%	0.09%
NZD	-0.25%	-0.17%	-0.18%	-0.21%	-0.31%	0.00%		0.11%
CHF	-0.35%	-0.27%	-0.28%	-0.32%	-0.41%	-0.09%	-0.11%

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. For instance, choosing the US Dollar on the left and following that row across to the Japanese Yen gives the percentage movement for USD (base)/JPY (quote) in the corresponding cell.

Fed Questions Answered

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

Responsible for US monetary policy, the Federal Reserve (Fed) has a dual mandate of maintaining price stability and promoting full employment. Interest-rate adjustments are its main means of pursuing these objectives. If prices climb too rapidly and inflation exceeds its 2% target, the Fed increases interest rates. Higher borrowing costs across the economy make the US more attractive to international investors seeking to place their funds, strengthening the US Dollar (USD). By contrast, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut rates. This encourages borrowing but puts pressure on the Greenback.

How frequently does the Fed meet to decide monetary policy?

At the Federal Reserve’s (Fed) eight policy meetings each year, the Federal Open Market Committee (FOMC) reviews the economic backdrop and takes monetary policy decisions. Twelve Fed officials participate in the FOMC: seven Board of Governors members, the president of the Federal Reserve Bank of New York and four of the other eleven regional Reserve Bank presidents. Those four presidents 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 sharply expand credit flows through a stalled financial system. An unconventional policy tool, QE is deployed during crises or periods of exceptionally low inflation. The Fed favoured this approach during the Great Financial Crisis in 2008, printing additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar generally weakens under QE.

Why does Quantitative Tightening (QT) usually support the US Dollar?

The opposite of QE, Quantitative Tightening (QT) involves the Federal Reserve halting bond purchases from financial institutions. As bonds in its portfolio mature, the Fed also refrains from reinvesting the principal in new bonds. This process generally supports the US Dollar’s value.