Inflation has further room to fall

Monetary policy in the U.S. is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and to promote full employment. Its main tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed's 2% target, it raises interest rates, which increases the cost of borrowing across the economy. This leads to a stronger U.S. dollar (USD) because it makes the U.S. 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 can cut interest rates to encourage borrowing, which weighs on the greenback.

The Federal Reserve (Fed) holds eight meetings a year at which the Federal Open Market Committee (FOMC) assesses the economic situation and makes monetary policy decisions. The FOMC is attended by twelve Fed representatives – the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the remaining eleven presidents of the regional reserve banks, who serve a rotating one-year term.

In extreme situations, the Federal Reserve may resort to a policy called quantitative easing (QE). QE is the process by which the Fed significantly 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-quality bonds from financial institutions. QE usually weakens the U.S. 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 from the maturing bonds to buy new bonds. This usually has a positive effect on the value of the U.S. dollar.