Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two missions: achieving price stability and promoting full employment. The basic tool for achieving these goals is adjusting interest rates. When prices rise too rapid and inflation exceeds the Fed’s 2% target, the Fed raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US dollar (USD) because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate becomes too high, the Fed may lower interest rates to encourage borrowing, which will negatively impact the dollar.

The Federal Reserve (Fed) holds eight policy meetings a year, during which the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. Twelve Fed officials attend the FOMC meeting – 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 apply a policy called quantitative easing (QE). QE is the process by which the Fed significantly increases the flow of credit in the gridlocked financial system. This is an unusual policy measure used during crises or when inflation is extremely low. This 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 tends to weaken the US dollar.

Quantitative Tightening (QT) is the reverse process of QE, in which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest capital from the bonds it holds at maturity to purchase modern bonds. This is usually positive for the value of the US dollar.