A strong dollar seems to harm the US outlook and even tilt the path of the Fed

(Bloomberg) – A strong dollar is likely to weigh negatively on the U.S. economic outlook and could alter the level at which the Federal Reserve will ultimately raise interest rates, said economists polled by Bloomberg.

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Nearly half of economists said international spillovers from a strong dollar were either somewhat likely or very likely to spill over to the United States over the next 18 months and affect monetary policy. Only 28% felt the strength of the currency was unlikely to have any impact.

The dollar has risen around 13% this year against other major currencies amid geopolitical tensions following Russia’s invasion of Ukraine and as the Fed aggressively raises interest rates to combat an inflation rate at its highest level in 40 years. The survey of 40 economists was conducted October 21-26.

Officials are expected to continue their campaign with another 75 basis point increase on Wednesday. Their latest forecast showed rates reaching 4.4% by the end of the year, rising from a current target range of 3% to 3.25%, and reaching 4.6% in 2023.

President Jerome Powell and his colleagues are trying to calm the economy and ease price pressures by deliberately tightening financial conditions in the United States, of which the value of the dollar is an important component. A stronger dollar tends to dampen inflation by reducing import costs and decreasing domestic production while increasing export prices.

“The Fed and its counterparts around the world are in the uncomfortable position of pressure on demand to respond to a supply-constrained global economy,” said Diane Swonk, chief economist at KPMG LLP, in a response to a survey. . “They understand there are fallouts, but have no way to openly address those risks given their own national mandates.”

What Bloomberg economists say…

“Usually, the trade deficit would swell when the dollar appreciates as much as we have seen since last year. But this effect has been curiously absent so far, even though we are already about five quarters away from the process. One possible explanation is that the United States is increasing its exports of energy products.The fact that this dollar tightening channel is absent means that the appreciation of the dollar is less restrictive for the economy than in the past.

— Anna Wong (Chief U.S. Economist)

Economists in the survey were divided on the severity of the financial strains and strains, with the majority seeing an impact on central bank decisions. In the survey, 44% said they believed the Fed could fully carry out its aggressive rate tightening despite possible tensions. But 38% said policymakers would be forced to cut rates sooner than expected and 18% said the Fed would not be able to raise rates as much as expected.

“The Fed may be able to increase as expected but will be forced to slow its pace to avoid financial instability,” said Julia Coronado, founder of MacroPolicy Perspectives LLC.

Survey respondents expect rates to peak at 5% early next year and the majority of economists now expect a US and global recession.

A number of prominent economists, including Nouriel Roubini, have warned that financial market turmoil could cause the Fed and other central banks to backtrack on the fight against inflation. “You have a major financial institution that could crack globally, not in the United States maybe now, but certainly internationally,” Roubini said.

Financial strains have been most recently evident in the UK, where the Bank of England has had to step in to support markets, and Liz Truss resigned as Prime Minister after just 44 days in office amid a backlash on his low-tax economic plan that has shaken investor confidence.

Two-thirds of economists said the UK market turmoil was very largely or exclusively the result of UK policies, as opposed to Fed tightening and a stronger dollar.

The Fed is sometimes referred to as the central bank of the world, reflecting the importance of the United States in the global economy. Three-quarters of economists say that’s a good description, though 33% also say the Fed doesn’t fully appreciate its role. In contrast, 22% said the Fed only has responsibility for the US economy and its national mandate of maximum job and price stability.

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