Fed Needs to Move Slowly

A strong dollar is a powerful dampener of U.S. inflation. Over the last twelve months, the dollar’s trade-weighted exchange rate rose 13.3 percent – marking 14.4 percent and 13 percent increases against the euro and the yen, respectively. These two currencies are legal tenders in one-fifth of the world economy, which is a destination for 18 percent of America’s foreign trade.

How important is all that in the Federal Reserve’s policy deliberations? There are two parts to the answer.  First, the dollar’s exchange rate operates directly on U.S. exports and imports, which represent nearly one-third of the economy.

Second, that impact is much wider. Acting as a de facto import subsidy, the rising dollar puts downward cost pressures on American import-competing industries. At the moment, these pressures are quite strong. Driven by the weakening energy market, the U.S. import prices declined 5.5 percent last year, showing the largest drop since 2008. Nonfuel import prices were also falling toward the end of 2014, but remained stable for the year as a whole.

CNBC

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