Fed Chairman Says The Economy Will Slow — And The Dollar Pays For It
- Nov 10, 2007
They’ve hinted at it before, using terms like " will likely slow."
But yesterday, Fed Chairman Ben Bernanke said in a speech — after months of a sluggish housing market, inconsistent spending and other brow-furrowing economic events — that the economy is expected to noticeably slow in the coming months.
Just in time for the holidays! That should thrill the retail industry (sorry, guys.)
The immediate result? The dollar hit a new low against the euro today and dropped further from the British pound, CNNMoney.com reported. That brings the dollar down more than 11 percent against the euro since the start of 2007. (In short: Now is not the time to plan that dream European vacation if you live in the U.S.)
The long-term result? After the last Fed rate cut, it seemed pretty likely there would be no more for quite some time — in its Oct. 31 statement, the Fed said, "Today’s action, combined with the policy action taken in September,
should help forestall some of the adverse effects on the broader
economy that might otherwise arise from the disruptions in financial
markets and promote moderate growth over time."
Many economists took that to mean "this move and the earlier one should do the trick." However, now that the Fed is glumly predicting the economy will decline soon, the financial market isn’t so sure we’ve seen the last of the Fed cuts.
"The stock market had been hoping that the Fed chairman would hold out
some promise of another rate cut but instead, he emphasized the risks
of inflation," David Jones, chief economist at DMJ Advisors, told CNNMoney.com.
And yet the dollar had different hopes. Its drops are partially a result of the possibility the Fed may offer further rate cuts. Another cut might shoot some adreline into the economy, true, but rate cuts often weaken currency because investors switch their money to higher-earning markets.
In a time when even the world’s supermodels are doing that — news broke this week that former Leonardo DiCaprio flame Gisele Bundchen is asking to be paid in any other currency than the U.S. dollar — you know it’s bad.
So which is better — a weaker dollar or a stronger economy? We’ll find out what the Fed thinks when it next meets, in early December.