CAMBRIDGE – American economic policy aims for a dollar that is strong at home and competitive abroad. A strong dollar at home means a dollar that retains its purchasing power, thanks to a low rate of inflation. A competitive dollar abroad means that other countries should not implement policies that artificially depress the value of their currencies in order to promote exports and deter imports.
The goal of a strong dollar at home has guided the Federal Reserve at least since Paul Volcker crushed inflation in the early 1980’s. Although the United States does not have a formal inflation target, financial markets understand that the Fed aims for an inflation rate close to 2%. And, while the law mandates the Fed to ensure sustainable growth as well as low inflation, monetary officials recognize that sustainable growth requires price stability.