Foreign exchange, the job the Federal Reserve won’t do
The Federal Open Market Committee meets next week, when it will issue a new edition of its popular (if rarely entirely accurate) Summary of Economic Projections. This columnist and other, wiser souls already have proposed ways the Federal Reserve could improve this quarterly dot-apalooza, but let me suggest one more: It would be great if the Fed would mention the exchange rate once in a while. Managing the dollar is the most important job no one in Washington is doing these days.
The strong dollar is the economic story of the year to date in Asia, with the Japanese yen, Korean won, Malaysian ringgit and others all hitting multiyear lows against the greenback. Expect the pandemonium to spread to Europe soon as interest rates start to fall there. Some commentators assume the trend can’t last, but it’s hard to see why.
One of the main drivers of greenback strength has been comparatively tighter U.S. monetary policy as manifested by higher short-term interest rates. Chairman Jerome Powell insists he’ll hold tight until the Fed achieves its 2% inflation target, but every other major central bank seems eager to cut rates as soon as possible, or in the Bank of Japan’s case to resist raising them.
A similar divergence is likely to persist in economic growth, another driver of exchange rates. This is the next calamity to afflict the euro: Europe insists on combining unsustainable social-welfare states, investment-punishing taxation, lunatic energy policies and deteriorating demographics. America’s impending election, as much of a car crash as it is, still offers more hope that some mix of growth-boosting policies may emerge than do any of Europe’s recent or imminent electoral fiascoes.
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