Thursday, January 30, 2014

The Fed, the Dollar, and Deflation (excerpt)

The woes of emerging economies could temper the Fed’s tapering in coming months by strengthening the dollar, which could push US inflation closer to zero. The JP Morgan Trade-Weighted Dollar Index has been trending higher since mid-2011. A strong dollar tends to depress inflation.

Indeed, the US import price index excluding petroleum has been falling over the past 10 months on a y/y basis through December, when it was down 1.3%. A stronger dollar would be bad news for commodity producers, especially in the emerging economies. When the dollar is rising, commodity prices tend to fall. Weak commodity prices have depressed the currencies of commodity-producers Canada and Australia over the past year.

The latest FOMC statement noted that near-zero inflation could be a problem for the US economy: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”

The emerging markets crisis, strength in the dollar, and weakness in commodity prices could frustrate the Fed’s expectations that inflation will rise back closer to 2%.

Today's Morning Briefing: The Fed & Emerging Economies. (1) Fed to EMs: “We wish you well.” (2) “Your problems are not our problem.” (3) A sanguine assessment. (4) Turkey and India act. (5) A scenario for tempering tapering. (6) EM crisis could boost dollar and depress US inflation. (7) US import prices deflating. (8) Weak stocks: Just a correction, or something worse? (9) From P/E-led to E-led bull market. (10) Both Cyclical and Defensive sectors hard hit ytd. (More for subscribers.)

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