Above: File image of Raphael Bostic. Image: Center for American Progress, reproduced under CC conditions.
The Dollar is under renewed pressure after two members of the Federal Reserve's interest rate setting committee (the FOMC) signalled the market was right to expect further interest rate cuts.
The Pound to Dollar exchange rate rallied to 1.3327, the highest level since March 2022, after FOMC member and Atlanta Federal Reserve president Raphael Bostic said "progress on inflation and the cooling of the labor market have emerged much more quickly than I imagined at the beginning of the summer."
In a speech to the European Economics and Financial Centre, he said, "in this moment, I envision normalising monetary policy sooner than I thought would be appropriate even a few months ago."
The Fed cut interest rates by 50 basis points last month and forecasts issued by members of the FOMC showed further rate cuts were in the pipeline. This boosted U.S. stocks, pressured U.S. bond yields and put Dollar exchange rates under pressure.
The next test for the Dollar is this week's speeches and media appearances by members of the FOMC, who would give their views on why the decision was made and what they thought the future held.
For his part, Bostic says the neutral rate the Fed should target is the 3-3.25% range, which implies ample space to cut interest rates further without risking stimulating inflation.
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He says near-term spikes in inflation should not delay the process, as inflation's path will be choppy.
However, he tempered enthusiasm by saying there is no need for a "mad dash to neutral" as the labour market is not yet deteriorating at a concerning pace.
FOMC member and Minneapolis Fed President Neel Kashkari said he sees about 50 basis points of cuts to come in 2024, which implies a slowdown to 25bp increments.
He said the labour market had not been driving inflation, which we interpret as a sign he thinks rates can be lowered to bolster the jobs market while not threatening an acceleration in inflation.
He says the labour market is strong, and he wants "to keep it that way" but that the battle against inflation has not been won.
So, while Fed policy remains tight, he thinks smaller steps are likely going forward and a repeat of last week's 50-pointer is unlikely.
For currency markets, the runway to further rate cuts is clear; this is supportive of stocks and will weigh on the Dollar.
