Fed’s Musalem: Current inflation level remains a concern for people

Inflation expectations remain anchored, St. Louis Federal Reserve (Fed) President Alberto Musalem said on Friday. However, he noted that “people remain concerned about inflation at the current level,” despite those anchored expectations.

Attributing current excess inflation to energy shocks and the AI buildout, Musalem said the Fed “must return inflation to 2% on a timely basis”.

Main points:

The current inflation level continues to concern people

Expectations for inflation remain firmly anchored

2% inflation must be restored in a timely manner

Energy shocks and the AI buildout are driving today's excess inflation

An optimistic outlook is supporting rapid growth in both consumption and investment

Much higher productivity will result from AI

Strong demand is being supported by data centre construction

Effective Fed communication makes policy transmission smoother

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

US Dollar: Today's Performance

The US Dollar recorded its strongest performance against the New Zealand Dollar today. The table below sets out the percentage changes in the US Dollar (USD) against the major currencies listed.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.61%	0.64%	0.30%	0.63%	0.63%	0.82%	0.43%
EUR	-0.61%		0.03%	-0.32%	0.04%	0.03%	0.21%	-0.18%
GBP	-0.64%	-0.03%		-0.34%	0.00%	0.00%	0.18%	-0.21%
JPY	-0.30%	0.32%	0.34%		0.35%	0.34%	0.53%	0.14%
CAD	-0.63%	-0.04%	-0.01%	-0.35%		-0.01%	0.17%	-0.21%
AUD	-0.63%	-0.03%	0.00%	-0.34%	0.01%		0.18%	-0.20%
NZD	-0.82%	-0.21%	-0.18%	-0.53%	-0.17%	-0.18%		-0.37%
CHF	-0.43%	0.18%	0.21%	-0.14%	0.21%	0.20%	0.37%

Percentage movements between the 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 its row across to the Japanese Yen gives the percentage change for USD (base)/JPY (quote) in the intersecting cell.

Fed: Key Questions Answered

The Federal Reserve's Role and Its Effect on the US Dollar

The Federal Reserve (Fed) sets US monetary policy with two objectives: stable prices and full employment. Adjusting interest rates is its main means of meeting those objectives. If prices climb too rapidly and inflation exceeds its 2% target, the Fed raises interest rates. Borrowing then becomes more expensive across the economy. Higher rates make the US more attractive to international investors seeking a place for their funds, strengthening the US Dollar (USD). By contrast, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates. Such cuts encourage borrowing but put pressure on the US Dollar.

Eight Meetings a Year: The Fed's Policy Schedule

At eight policy meetings each year, the Federal Open Market Committee (FOMC) reviews economic conditions and decides monetary policy for the Federal Reserve (Fed). Twelve Fed officials attend the FOMC: all seven Board of Governors members, the president of the Federal Reserve Bank of New York, and four presidents drawn from the other eleven regional Reserve Banks. Those four serve rotating one-year terms.

Quantitative Easing (QE): How It Affects USD

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

Quantitative Tightening (QT): Implications for the US Dollar

To reverse QE, the Federal Reserve uses quantitative tightening (QT). It stops purchasing bonds from financial institutions and no longer reinvests the principal repaid on its maturing bond holdings in new bonds. This process generally supports the value of the US Dollar.