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T-2 Weeks and Holding
Tuesday, June 2, 2015 6:30 AM

Dollar Dilemma

With the U.S. dollar’s rapid valuation rise globally in previous months, the Fed’s models show the greenback will drag on the economy in coming months. This and other factors have prompted some Fed officials to lower their latest growth forecasts and to wait even longer to move on rates.

Fed officials say they won’t act until they see more labor-market improvement and are confident that inflation will rise toward their 2 percent goal.To show how the dollar figures into the thinking, the Feds use an economic model called “Ferbus,” for FRB/US (Federal Reserve Bank United States), which crunches hundreds of mathematical formulas to estimate how the economy will perform.

Program into the model an upside or downside shock to the economy, such as government spending cuts or an increase in productivity, and the model will create the expected impact on everything from economic output and unemployment to interest rates and stock prices.

Fed officials rely heavily, but not exclusively, on FRB/US’ calculations, which suggest the dollar’s hit to the economy is just being felt.

According to “Ferbus,” a 10 percent increase in the exchange rate has the following effects:

  • Growth is shaved off GDP
  • U.S. exported goods are more expensive
  • Foreign imported goods are cheaper
  • Imports push down U.S. inflation
  • Inflation will run below the Fed’s 2% target
  • Lower inflation raises consumer purchasing power
  • A decline in oil prices would boost economic growth
  • A decline in oil prices will lower exploration and increase unemployment

A stronger U.S. dollar will help a weaker euro and yen, which helps boost the beleaguered economies of the European Union and Japan.

 

Source:  The Wall Street Journal, 1 June 2015