Powell speech grabs attention in the American afternoon, focus on Trump
- Remarks from Fed Chair Jerome Powell will heat the US session on Thursday.
- Fed officials maintain the monetary policy path despite the new political scenario.
- Powell’s speech and Fed commentary will likely revolve around Trump’s victory.
Federal Reserve (Fed) Chairman Jerome Powell is due to participate in a panel discussion titled "Global Perspectives" at an event hosted by the Federal Reserve Bank of Dallas this Thursday, and speculative interest eagerly awaits his words.
The Fed had recently delivered as expected, trimming the benchmark interest rate by 25 basis points (bps) in November after cutting it by 50 bps in September. Back then, the Fed established a monetary policy path, which continues as planned.
However, the outcome of the recent United States (US) presidential election has made investors wonder for how long.
Fed policymakers and the Republican victory
The return of former President Donald Trump to the White House has fueled concerns about renewed inflationary pressures, as his platform would move the economy in a sharply different direction. Tax cuts, tariffs on foreign goods, and harsh migration policies are among Trump’s motto.
The Fed, particularly Chairman Jerome Powell, had done their best to clarify the central bank’s independence from the government, but that’s far from enough to grant a smooth continuation of the current monetary policy.
With a Republican Congress behind Trump, things will take an interesting twist next year, and financial markets are not quite sure where that will end.
About Jerome Powell (via Federalreserve.gov)
"Jerome H. Powell first took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. He was reappointed to the office and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."
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.