Will the Fed Hold the Course on Dollar Value?

Last year, Congress passed a bill that proved to be a one-time act. The bill allowed corporations, who operate abroad, to bring home tax-free dollars. I am certain this bill was backed by the Federal Reserve Bank. Moreover, it allowed Greenspan to push dollar value higher in 2005, making it possible slow price inflation. The Fed would have been hard-pressed to keep its measured interest rate hike policy in place without this added pressure on price hikes.

The law of physics states that for every action there is an equal and opposite reaction. This law not only applies to physics, but to most aspects of life. Therefore, two things emerged when Congress opened the floodgates and allowed corporations to repatriate dollars from abroad—one occurring at home and the other abroad.

It caused MZM (money to zero maturity) to remain tight in the U.S., thus causing corporations to make fewer loans to build infrastructure. Fewer dollars remained abroad because tens of billions of dollars returned home. Therefore, dollar value moved higher, hence, supply & demand. The estimated fifty to eighty billion dollars that moved back to the U.S. has, by now, begun to move out of corporate coffers and into the economy. Many corporations have begun buying back their own stock, while others are starting to rehire, improve infrastructure, and raise wages, thus pressuring prices to move upward.

The question that should concern all of us is will the dollar move lower or higher? The movement of the dollar is critical to our well-being because it affects stock holdings, jobs, and the purchasing power of your savings.

FOMC member Crum, who spoke a few weeks ago during a European meeting, suggested that the Fed’s method of tracking inflation was outdated. He commented that the Fed’s current method overemphasizes rising prices, stating that the Fed needed more balance and, furthermore, direct its attention to prospects of disinflation.

In the past, when public statements by FOMC members criticized Fed policy, it, more often than not signaled a change in Fed policy. However, this fact is more meaningful now than it was in the past. Greenspan, a lame duck chairman, plans to retire early next year. The next FOMC Chairman may ride into office based on a promise of policy change. The direction of the dollar is the most important policy strategy the U.S. economy faces. Thus, its direction will affect every investment in your portfolio. STAY TUNED!