IN OTHER WORDS
Despite the Federal Reserve’s latest stay-the-course message, investors are betting on at least one interest-rate cut by January, intended to quell turmoil in the markets and to juice the slow economy. But with the dollar also weak – recently hitting its lowest point in 15 years against an index of other major currencies – the Fed may be reluctant to oblige.
A declining dollar is a source of inflationary pressure because it can boost the cost of imports. So if the Fed tried to rev up the economy with a rate cut at the same time the dollar is falling, it could end up provoking even more inflation. That would be a drag on economic growth rather than a boost.
How did the Fed lose room to maneuver? The answer is rooted in the Bush administration’s misguided economic policies. In volatile economic times like now, leadership is crucial. Officials have made no effort to orchestrate a more coordinated and comprehensive realignment of the world’s currencies, in part, it seems, because the administration is unwilling to have America do its part by saving more. Until the administration — either this one or the next — is willing to acknowledge the source of the economy’s imbalances, and starts addressing them seriously, the dollar is likely to remain weak. And the Fed’s ability to maneuver will be constrained. —