The strength of the dollar harms the prospects of the US economy and changes the course of raising interest rates
Economists polled by "Bloomberg" suggested that the strength of the dollar will negatively affect the future outlook of the US economy, and the extent to which the Federal Reserve raises interest rates may change.
Nearly half of the economists said that it is somewhat likely or very likely that the international repercussions of the dollar's strength will reverberate back into the US in the next 18 months and influence monetary policy. Only 28% thought that the strength of the currency would not have any effect.
The dollar rose about 13% this year against other major currencies amid geopolitical tensions that followed the Russian invasion of Ukraine, while the Federal Reserve raised interest rates dramatically to combat the highest inflation rate in 40 years. The survey, which included 40 economists, took place between October 21 and 26.
deliberate emphasis
Officials are expected to continue the tightening campaign with another hike of 75 basis points on Wednesday. Officials' latest projections showed that interest rates will reach 4.4% by the end of the year from the current target rate of 3% to 3.25%, rising to 4.6% in 2023.
Also read: “The Federal Reserve” may raise interest rates to 5% and cause a global recession
Federal Reserve Chairman Jerome Powell and his colleagues are trying to cool the economy and ease price pressures by deliberately tightening the US fiscal situation, of which the value of the dollar is an important part. A stronger dollar usually curbs inflation by lowering import costs and lowering domestic production, as it raises export prices.
“The Federal Reserve and its peers are in the uncomfortable position of having to curb demand in the face of a global economy with constrained supply,” Diane Swonk, chief economist at KPMG, said in a survey response. But they don't have a way to deal with these risks explicitly given their local missions."
Economists in the survey were divided on the seriousness of financial tensions and pressures in the future, and the majority expected an impact on the central bank's steps. In the survey, 44% said they believe the Fed can carry the aggressive monetary tightening cycle to its conclusion despite potential tensions. However, 38% said policy makers would have to cut interest rates earlier than expected, while 18% said the Fed would not be able to raise interest rates as planned.
recession forecast
“The Fed may be able to hike as much as planned, but it will have to slow down to avoid financial instability,” said Julia Coronado, founder of MarcoPolicy Perspectives.
Also read: China faces difficult choices in defending a falling yuan against a strong dollar
Respondents expect interest rates to peak at 5% early next year, while a majority of economists now expect a recession in the US and globally.
A number of prominent economists, including Nouriel Roubini, have warned that problems in money markets could lead to the withdrawal of the Federal Reserve, as well as other central banks, from fighting inflation. "Any major financial institution around the world could crack under pressure, perhaps not in the US at the moment, but certainly internationally," Roubini said.
Federal mission
The latest financial tensions have emerged in the UK as the Bank of England was forced to step in to support markets, and Liz Truce resigned as prime minister after 44 days in the job, amid a backlash to her tax-cut economic plan that has shaken investor confidence.
Two-thirds of economists said the British market turmoil resulted exclusively or largely from UK policies, rather than from a tightening of the Federal Reserve and a stronger dollar.
The Federal Reserve 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 is aptly described, although 33% also say the Fed does not fully appreciate its role. In contrast, 22% said the Fed is responsible only to the US and its domestic mandate of maximizing employment and price stability.
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