The Fed’s take on economic growth as the US dollar appreciates


Nov. 20 2020, Updated 3:49 p.m. ET

The International Monetary Fund’s (or IMF) take on US monetary policy

The “World Economic Outlook” report, released by the IMF in October, notes that the removal of unconventional stimulus measures by the Fed at its October Federal Open Market Committee (FOMC) meeting was appropriate. The IMF also believes increasing the Fed funds rate starting in mid-2015 would be appropriate, bearing in mind the “still-sizable output gap and subdued inflation.” But the pace of rate-tightening may have to be adjusted depending on how close the Fed is to achieving its twin goals of full employment and inflation.

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Correctly interpreting the labor force participation rate is critical. It would give policymakers an understanding of the remaining amount of slack in the labor market—how much of it’s cyclical and how much, structural. Cyclical unemployment can be fixed by policymakers to an extent. Addressing structural issues is mostly beyond the ambit of central-bank policymaking.

For more on the employment issues facing the economy, read the analysis of Fed Chair Janet Yellen’s speech at Jackson Hole in Why Janet Yellen’s view on the labor market was a surprise.

Conflicting signals by the Fed: FOMC participants discuss the impact of slowing global growth

At the Fed’s September FOMC meeting, participants discussed the impact of slowing global growth on the US economy. The implications of low inflation and a rising dollar were also discussed. Yet, at October’s FOMC meeting, the Fed was sufficiently confident about the prospects for the US economy. So it removed one of its major pillars supporting an easy-money regime, monthly bond purchases.

Implications of an appreciating US dollar

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The Fed believes persistently low inflation and an appreciating dollar will impact gross domestic product (or GDP) growth in the coming quarters. Last week, the Broad, or Trade-Weighted US Dollar, Index reached 107.8, a level last seen in May 2009. The US dollar is already trading at seven-year highs against the Japanese yen.

One of the most important impacts of an appreciating dollar is on the net exports component of the GDP. A higher US dollar makes US goods less competitive in overseas markets.

Both commodity prices and energy prices have fallen in world markets since the Fed’s September FOMC meeting. Brent crude oil fell to $77.52 this month, its lowest level in four years. This should benefit the US GDP by lowering the value of imports. It should also benefit the profits of corporations (IVV) (SPY) (DIA) (QQQ) (IWM) and the pockets of consumers, since both will now pay lower energy costs.

Read about the better bets among US stocks and bonds in the next section of this series.


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