According to a recent Reuters poll, 115 out of 117 economists expect the Federal Reserve to lower the Federal Funds Rate by 25 basis points to a range of 3.75%–4.00% during its upcoming policy meeting on October 29.
Looking ahead, 83 of the surveyed economists anticipate two more rate cuts by the end of the year, while 32 expect just one. Among those weighing long-term risks, 25 of 33 respondents believe the biggest threat is that the Fed may lower rates too far by the end of the current easing cycle.
Market Response
Despite growing expectations of further rate cuts, the US Dollar Index (DXY) has risen for a second consecutive day, climbing 0.35% to near 98.95. This suggests market participants are still showing confidence in the US economy or pricing in other global factors favoring the dollar.
Fed Policy: Key Questions Answered
What does the Federal Reserve do, and how does it affect the US Dollar?
The Fed manages US monetary policy with two main goals: maintaining price stability and promoting maximum employment. Its primary tool is the adjustment of interest rates. When inflation rises above the 2% target, the Fed raises rates to cool the economy, which tends to strengthen the US Dollar by attracting foreign investment. Conversely, when inflation is low or unemployment is high, it lowers rates to stimulate economic activity, often weakening the dollar.
How often does the Fed meet?
The Federal Open Market Committee (FOMC), which sets monetary policy, meets eight times a year. The committee consists of 12 voting members: the seven Fed Governors, the president of the New York Fed, and four rotating regional Fed bank presidents.
What is Quantitative Easing (QE)?
QE is a non-traditional policy tool used in times of crisis or very low inflation. It involves the Fed purchasing large quantities of government bonds to inject liquidity into the financial system. While it supports economic recovery, it typically weakens the US Dollar due to the increase in money supply.
What is Quantitative Tightening (QT)?
QT is the opposite of QE. The Fed reduces its bond holdings by allowing them to mature without reinvestment. This decreases liquidity in the financial system and usually strengthens the US Dollar by tightening financial conditions.