The Fed’s Dollar Distraction
CAMBRIDGE – In its September policy statement, the US Federal Reserve took into consideration – in a major way – the impact of global economic developments on the United States, and thus on US monetary policy. Indeed, the Fed decided to delay raising interest rates partly because US policymakers expect dollar appreciation, by lowering import prices, to undermine their ability to meet their 2% inflation target.
In reality, while currency movements can have a significant impact on inflation in other countries, dollar movements have rarely had a meaningful or durable impact on prices in the US. The difference, of course, lies in the US dollar’s dominant role in the invoicing of international trade: prices are set in dollars.
Just as the dollar is often the unit of account in debt contracts, even when neither the borrower nor the lender is a US entity, the dollar’s share in invoicing for international trade is around 4.5 times America’s share of world imports, and three times its share of world exports. The prices of some 93% of US imports are set in dollars.