Forex Blog: Currency Trading News & Analysis.

April 28th 2005

Fed faces a Hobson’s choice

First quarter real GDP growth was reported to be 3.1%, below the 3.5% that economists had previously forecasted. On the surface, this appears to support claims that the US economy is gradually losing steam. However, many investors believe this quarter may represent an aberration, and they continue to be bullish in their short and long term forecasts. The release of GDP data coincided with the release of inflation data, which indicated inflation is indeed increasing. This has led many economists to observe that the Fed faces a so-called Hobson’s choice, in conducting monetary policy. The nature of the dilemma dictates the Fed has two options.  It can either to continue to raise rates, in order to keep pace with rising inflation. Instead, it may opt to freeze rates in the short term, to combat unemployment by stimulating the economy. The Financial Times reports on the implications for the USD:

A senior currency strategist…argued that stagflation should have the unintended consequence of supporting the dollar; while rising rates encourage buying of US bonds, weak growth should cut demand for imports, allowing the trade deficit to narrow.

Read More: Dollar Edges up as Market Undecided over GDP data

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Posted by Adam Kritzer | in Politics & Policy, US Dollar | No Comments »

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