With the falling value of the dollar comes a threat that has not seriously faced the U.S economy for two decades -- inflation.
Philip Jefferson, a Swarthmore College economics professor and former research economist at the Federal Reserve Board, says the Fed will face a tough decision in coming months if the dollar continues to fall, thus raising costs for American businesses.
"As the dollar continues to fall relative to the yen, euro, and other currencies, that means additional costs to American businesses to import what they need to produce their goods," Jefferson says. "As the price of imported goods continues to rise, so will pressures on businesses to raise their prices. This might force the Fed to raise interest rates even though the economy has not recovered fully from the recession."
The conflicting imperatives to hold off inflation and fuel further growth -- all with the midterm elections approaching -- are making this a particularly tense time for economic policymakers, notes Jefferson, whose research deals with the interplay between monetary policy and macroeconomic trends. On one hand, an economy suffering from the troubled stock market and recent corporate scandals can ill afford an interest rate increase. On the other hand, Jefferson says, inflation could gain a foothold if the Fed does not counteract the effect of more expensive imports.
Jefferson's advice to Alan Greenspan? Don't actually raise interest rates, but certainly resist calls for another lowering of rates in the hope of boosting the stalled recovery.
"We don't see inflation yet," Jefferson says, "but with the dollar falling, the Fed knows it is a clear and present danger."
Located near Philadelphia, Swarthmore is a highly selective liberal arts college with an enrollment of 1,450. Swarthmore is consistently ranked among the top liberal arts colleges in the country.
RSS