Federal Reserve Shows Other Central Banks How It Should Be Done

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Federal Reserve Shows Other Central Banks How It Should Be Done
Federal Reserve Shows Other Central Banks How It Should Be Done

Federal Reserve Shows Other Central Banks How It Should Be Done

Developed economies across the globe have all, to varying degrees, embarked on the path to economic recovery.

A quick check of the vital signs show that the UK, Eurozone, Australia and many others are jointly enjoying the early stages of a return to prosperity. GDP growth rates are positive, if low. Inflation rates are comfortably between 1% and 2%. Unemployment rates are in general back in single figures and trending lower.

The US is also a key member of this growth club. Yet unlike the others it is displaying one advantage, a weak US Dollar.

The euphoria caused by even the slimmest signs of growth in many developed economies is causing rapid currency appreciations. The Euro and Pound Sterling for example have both set multi year highs against the US Dollar in recent weeks.

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A strong currency is a badge of honor for many countries, and when everything is going well it is an affordable luxury, perhaps even a necessity in order to stabilize growth. But when your economy is in the recuperation lounge you need everything going for you. Global competitiveness, trade balances and foreign direct investment are all positive side effects of a weak currency. More than that they are the minimum requirements to be met to encourage a rapid return to healthy growth.

The US Federal Reserve gets this. It’s new chairperson, Janet Yellen did something very clever at her recent testimony to the US Senate. She deftly threw enough doubt over the validity of the US recovery to enable her to further delay the already postponed adoption of a tightening monetary stance. This was not done in a way that would warrant concern over the state of the US economy. Yellen used ‘smoke and mirrors’ tactics to explain that recent soft US data may or may not have been caused by the extreme winter weather. The core message being that the US economy is healthy but given recent exogenous events we will hang on to our loose monetary policy for the time being, just to be sure.

Yellen effectively talked down the Dollar without talking down the US economy. There is a valuable lesson here for other Central Bankers.

To contact the reporter of this story: James Brennan at james@forexminute.com