Strong Dollar Is Killing U.S. Economic Growth and Putting Fed Rate Hikes on Hold

NEW YORK (TheStreet) -- The strong dollar continues to drag down U.S. growth, complicating the Federal Reserve's plans to raise interest rates, and casting serious doubts on President Obama's proposed free trade agreement with Asian nations.

The Commerce Department reported first quarter GDP was down 0.7%. The severe winter put the skids on new home construction, and falling oil prices nixed investments in structures and equipment. Those issues, as well as the now-ended West Coast port strikes, will impose less drag on the economy in the second quarter.

However, the relative strength of the dollar -- precipitated by aggressive monetary policies in Japan, South Korea, China, and Europe that are pushing the values of their currencies down -- will have enduring and substantial negative consequences for U.S. growth.

In the first quarter alone, lost exports subtracted 1.0 percentage point from growth, and increased imports stole another 0.9.

The Federal Reserve has already decided to postpone raising interest rates until the autumn, and built into my forecast is a first move toward normalizing rates in the third quarter.

 

Stronger household balance sheets, a robust interest in new automobiles with better gas mileage and other advanced features, and a pickup in new home construction should boost growth to about 2.8% by the third or fourth quarter. However, that would be well short of the 4% or 5% growth the economy could accomplish given the large numbers of underemployed recent college graduates and the 7 million men ages 25 to 54 who are jobless and not seeking employment.

The headwinds created by beggar-thy-neighbor foreign monetary policies and a strong dollar will persist and complicate Fed efforts to gradually "normalize" interest rates, which it currently views as raising the overnight bank borrowing rate (federal funds rate) from its current 0.125% to 3.75%.

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