NEW YORK (TheStreet) -- Officials at the Federal Reserve are between a rock and a hard place. The culprit? The strong United States dollar.
The difficulties of the Fed can be split into a short-term problem and a long-term problem. In the short run, a stronger dollar has stifled U.S. exports and weighs down on GDP, pushing the Fed to keep interest rates low as the economy continues to go sideways. In the long run, the Fed has to worry about the threat of China's renminbi becoming a world reserve currency.
The Short-Term Problem: The Dollar, the Fed and the U.S. Economy
Although the value of the U.S. dollar has fallen from a highs hit on March 13, 2015, its price in foreign exchange markets has recovered somewhat and has seemingly stabilized. On March 13, 2015, the U.S. dollar index, published by the Wall Street Journal, had risen by more than 25% since March 13, 2014. The value of the U.S. dollar rose more than 27% against the Euro over the same period of time.
The value of the dollar fell after reaching these highs and on April 15, 2015, the US dollar index was off almost 7% and it dropped by 8% against the euro that day.
The dollar rally has resumed and many analysts are looking for the value of the U.S. dollar against the euro to rise close to parity, one dollar exchanged for one euro. Quite a change from the rate of exchange in very early 2014 when it took almost $1.40 to acquire one euro.
The downside: with the rising strength of the U.S. dollar, the rate of growth of the United States economy has slowed down, with U.S. exports falling noticeably and with U.S. imports rising.
Even if the value of the U.S. dollar were to decline over the next few months, the econometric models used by the Federal Reserve System seem to indicate that future economic growth will be further impacted by the rise in the value of the dollar that has already taken place.
Officials at the Federal Reserve are on the verge of raising short-term interest rates. The timing of this raise is being hotly debated, both within the Fed and without.
Stanley Fischer, vice chairman of the Board of Governors of the Federal Reserve, has attempted to put such a raise in perspective so that such a rise will not cause a major turn in financial market expectations. Fischer has argued that any increase or two that takes place in the near future is just a move from the Fed being "ultra-expansionary" to being "very expansionary."
The dilemma now being faced by the Fed is that slower economic growth, caused by the strength of the U.S. dollar, could result in the Federal Reserve postponing any rate increases in the rest of 2015, and maybe beyond.