On Friday, the Dallas Federal Reserve President Lorie Logan said that “at least two more quarter-point rate hikes” are needed. She added that skipping a hike “doesn’t change policy destination,” and that adjusting interest rates “gradually” reduces the risks of a sharp economic deterioration.

Logan added that is “unacceptable” that inflation is getting higher and that after increasing rates 50 basis points, “a pause would make sense” to determine the path going forward.

Key highlights:

Fed needs at least two more quarter-point rate hikes

Skipping a meeting doesn't change policy destination
Adjusting policy gradually can reduce risks of sharp economic deterioration
Gradual policy adjustment helps households, businesses, investors adapt to higher rates
End goal is to make policy modestly restrictive
Making policy rate destination clear helps economy adapt, obtain benefits of a skip
'Unacceptable' that inflation is not headed back to fed's 2% target
After 50 bps of rate hikes, a pause would make sense to determine what further action is appropriate
Financial conditions are providing a tailwind to the economy
Higher market rates a message that investors believe monetary policy has work to do
Long-term rates have risen, but don't represent much of a drag on economy as might be expected
Economic growth is strong, consumer spending solid
Labor market is balanced, perhaps tightening a bit

Fed FAQs

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.

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.

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.

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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