The weak dollar and high inflation are big problems. So what’s the remedy? According to Federal Reserve Bank of Kansas City President Thomas Hoenig, a rate increase. With dour economic news coming out of Europe, the dollar may finally have a real reason to strengthen. Unfortunately, the remedy for these ailments may also kill the sputtering economy.
The dollar strengthened versus the euro as Hoenig of the Kansas City Fed said in a speech in Denver yesterday that ‘‘serious” inflation pressure in the U.S. may compel the central bank to increase interest rates.
“There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,” said Hoenig, who isn’t a voting member of the Federal Open Market Committee this year. Consumers are gaining an “inflation psychology to an extent that I have not seen since the 1970s and early 1980s.”
The U.S. currency has rebounded 3.7 per cent versus the euro since April 22, when it sank to a record low of $1.6019. The Fed said rate reductions to date were “substantial” after lowering its benchmark rate last week by a quarter-percentage point to 2 per cent, its seventh cut since September.