MNI EXCLUSIVE: Fed Sees Stimulus Bump From Weaker Dollar

The Fed likely welcomes the U.S. dollar's slide for giving a small boost to flagging inflation and exports to Europe, where growth is pulling ahead on more effective government relief spending and pandemic containment, former officials told MNI.

"Relative to a world in which the dollar remained at its March 23 level, the depreciation since then will make the Fed's job of attaining its dual mandate a little easier," former Fed Board research director David Wilcox said in an interview. The dollar back then was at a 3-year high against the euro and a multi-decade high against the pound, and has come down 10% against a basket of currencies.

"The dollar has depreciated for undesirable reasons, importantly having to do with a failure to bring the virus under control" and the growing gap between U.S. and European growth prospects, Wilcox said. "It will serve as a shock absorber to offset some of the effect of the fiscal negotiations" that have stalled in Congress.

"From a strictly domestic point of view, you would probably say some weakness in the dollar is good," former Minneapolis Fed President Gary Stern told MNI. The depreciation "will benefit some sectors of the economy," particularly exports, even for a U.S. economy geared more towards domestic demand, he said.

LOW ON RADAR

One thing the dollar reflects is market skepticism that unprecedented Fed balance-sheet stimulus will create much inflation, which was 1% in July. Wages are also being held down by unemployment that hit a record 14.7% during the health shutdown.

So far, Fed officials have followed their traditional reluctance to comment on the dollar's value out of deference to the Treasury, and unlike the global financial crisis the U.S. isn't being accused of using a weak dollar to prop up its economy.

Policy makers like Jerome Powell and Mary Daly have often said the most urgent need is a strong health and fiscal response to put money in people's pockets while monetary action shifts from stabilizing money and bond markets to supporting an economic recovery.

With those issues in the forefront, "the dollar hasn't garnered a lot of broad attention," Stern said. "I don't think it's high on the policymakers' agenda at the moment."

TREASURY GLUT?

"The bigger threat is Congress won't spend enough to prop up the economy," Wilcox said.

Given the struggle to contain Covid-19, the dollar weakness "is clearly a better world" for the U.S. economy, he said.