- Fed Chair Jerome Powell’s comments will be closely watched midweek for clues on the outlook for interest rates.
- The Fed is expected to cut its interest rates by a quarter point at this month’s meeting.
- The US labor market takes center stage this week, with the NFP due on Friday.
Federal Reserve Chairman Jerome Powell will participate in a moderated discussion on the economic outlook on Wednesday at the New York Times’ DealBook Summit in New York. Investors will closely monitor his comments, eager for any signal on future monetary policy.
The event comes as markets largely expect the Fed to cut its policy rate by another 25 basis points during its December 17-18 meeting. However, this expectation lost some momentum following Powell’s comments at an event in Dallas on November 14.
During his speech in Dallas, Powell indicated that the Fed could take its time before making further rate cuts. He pointed to steady economic growth, a strong labor market and inflation that remains above the Fed’s 2% target as reasons for a cautious approach. His comments aligned with the views of FOMC Governor Michelle Bowman, who has consistently advocated for a cautious stance on rate adjustments.
So far, the probability of a 25 basis point rate cut this month stands at about 75%, according to the CME Group’s FedWatch tool. However, investors anticipate no more than 75 basis points of easing over the next 12 months.
The Fed and Trump: A Collision Course Ahead?
Former President Donald Trump’s return to the White House has raised concerns about renewed inflationary pressures. His proposed policies could significantly alter the economic landscape, with looser tax measures, the reintroduction of tariffs on exports from China, Europe, Mexico, Canada and the BRICS nations, as well as stricter immigration policies.
In fact, a new chapter in the trade war between the US and China has already begun. China recently announced a ban on exporting gallium, germanium and antimony to the US, minerals critical for military technologies. This move came a day after Washington introduced new restrictions targeting China’s semiconductor industry.
Although Powell has repeatedly declined to speculate on the economic impacts of potential policies under a renewed Trump administration, it is likely that any resurgence in inflationary pressures could lead the Fed to pause or even halt its current easing cycle.
Amid these developments, the US Dollar (USD) soared in October and November before entering a period of consolidation/correction. However, this pause should be temporary, leaving the bullish outlook for 2025 unchanged.
The Fed FAQs
The monetary policy of the United States is directed by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability and promoting full employment. Your main tool to achieve these objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the Federal Reserve’s 2% target, it raises interest rates, raising borrowing costs throughout the economy. This translates into a strengthening of the US Dollar (USD), as it makes the United States a more attractive place for international investors to place their money. When inflation falls below 2% or the unemployment rate is too high, the Federal Reserve can lower interest rates to encourage borrowing, which weighs on the greenback.
The Federal Reserve (Fed) holds eight meetings a year, in which the Federal Open Market Committee (FOMC) evaluates the economic situation and makes monetary policy decisions. The FOMC is made up of twelve Federal Reserve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven presidents of the regional Reserve banks, who serve for one year on a rotating basis.
In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged 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 of 2008. It involves the Fed printing more dollars and using them to buy high-quality 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 capital of the maturing bonds it has in its portfolio to buy new bonds. It is usually positive for the value of the US Dollar.
Interest rates FAQs
Financial institutions charge interest rates on loans from borrowers and pay them as interest to savers and depositors. They are influenced by basic interest rates, which are set by central banks based on the evolution of the economy. Typically, central banks are mandated to ensure price stability, which in most cases means targeting an underlying inflation rate of around 2%.
If inflation falls below the target, the central bank can cut base interest rates, in order to stimulate credit and boost the economy. If inflation rises substantially above 2%, the central bank typically raises core lending rates to try to reduce inflation.
In general, higher interest rates help strengthen a country’s currency by making it a more attractive place for global investors to park their money.
Higher interest rates influence the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or depositing cash in the bank.
If interest rates are high, the price of the US Dollar (USD) usually rises and, since Gold is priced in dollars, the price of Gold falls.
The federal funds rate is the overnight rate at which U.S. banks lend to each other. It is the official interest rate that the Federal Reserve usually sets at its FOMC meetings. It is set in a range, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the figure quoted.
Market expectations about the Federal Reserve funds rate are tracked by the CME’s FedWatch tool, which determines the behavior of many financial markets in anticipation of future Federal Reserve monetary policy decisions.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
