Cyrillic Partners

We’ve been writing a lot recently on the effects of the falling dollar, its impact on earnings and what the Federal Reserve is likely to do because of it.

Paul Krugman has an interesting blog post about it, worth reading. The takeaway is excerpted below:

Finally, there’s a fairly subtle argument about term structure and timing.

You see, the Fed only controls short-term interest rates, while investment spending depends on long-term rates. Meanwhile, the effects of a weak dollar on exports take a while, maybe as much as two years, to take full effect.

So there’s a story that runs something like this: a plunging dollar will eventually be very expansionary, and will force the Fed to raise rates to cool off the economy — not now, but a year or two from now. But the expectation of this future rise in short-term rates will push up long-term rates now, causing a recession even if the Fed does nothing.

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