The Federal Reserve Needs to Consider the Strengthening Dollar in This Week's Meeting

NEW YORK (TheStreet) -- If the Federal Reserve wants an orderly "return to normal" as it raises rates, it's going to have to start talking more about the strong dollar.

The Fed's policy-setting Federal Open Market Committee meets this Tuesday and Wednesday, and almost everyone will be watching closely, trying to get a handle on what the central bank has in store for the financial markets.

The earlier betting was that the Federal Reserve would begin its effort to raise short-term interest rates at this meeting.

Right now, the betting for an interest rate hike has moved to September and possibly even later. The U.S. economy just does not seem to be strong enough in the eyes of Fed officials to begin raising interest rates.

The Federal Reserve wants to get back to "normal," whatever that is. The Fed has done a lot of thinking on how it might accomplish this "return to normal," but, as Fed officials have admitted, they have never had such a challenge as the current one. In this environment, one thing they need to do is start discussing the value of the dollar -- something they haven't really done publicly so far.

As of last Wednesday, the Fed had reduced the amount of excess reserves in the banking system by almost $160 billion since Oct. 15, 2014, the date on which excess reserves peaked at the end of the Fed's latest round of quantitative easing.

This reduction seems to be a part of the Fed's efforts to modestly reduce the excess reserves in the banking system before any attempt is made to increase short-term interest rates.

But this has been tricky business, and the Fed has used tools such as reverse repurchase agreements, or reverse repos, and term deposits to manage this reduction in excess reserves.

For example, on June 3, excess reserves in the banking system were $172 billion lower than they were on June 10 as the Fed added excess reserves to banks throughout the week, almost solely by managing its portfolio of reverse repos and term deposits.

In removing reserves from the banking system, the Fed is being extraordinarily cautious because it does not want to reduce liquidity in the banks if the banks still want that liquidity on their balance sheets.

Sooner or later, however, the Fed is going to have to start raising short-term interest rates and making a strong case for how it's doing that.

That's where the discussion of the greenback comes in.

The dollar's strength and what it says about the global economy is going to become more and more of an issue in the future. The Federal Reserve is going to have to respond to this issue and might as well start getting investors used to its importance in monetary decisions.

The importance of the currency's value was underlined last week as German Chancellor Angela Merkel called for the markets to make the euro weaker relative to the dollar. Ms. Merkel appears to need a weaker euro for the eurozone economies to continue to recover, especially as the Greek situation works itself out.

But Merkel wants a weaker euro only until she is convinced that Europe is solidly growing. Once that goal is achieved, she will be back on the side of a strong euro in order to compete in the changing global financial order. She understands the need for a strong currency to compete with the Chinese in the future.

The Federal Reserve needs to move in this direction. The current "strong" dollar is an accident, an accident that has resulted from the central bank of the U.S. being on a different time schedule from the central banks in Europe and other regions.

And this situation will end as Germany and the eurozone, and others, move toward strengthening their economic positions in the world.

The time seems right for officials at the Fed to start focusing more on the value of the dollar and for these officials to begin educating investors and others about the importance of the U.S. having a "strong" currency.

The time is right because the pressure to do so is not that great. It still is going to take some time for the Europeans and Chinese and others to really challenge the primacy of the dollar.

The Federal Reserve needs to move in this direction so as to help create the groundwork for the new economic policies required by the new economic era and to prepare U.S. workers for the evolving workplace.

The Federal Reserve and the U.S. must move toward a strong dollar goal. There is no better time to start than right now.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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