Markets Want Fed to Raise Rates, Which Is Why Dollar Declines When Rates Hold Steady

The world seems to want a United States with a strong dollar but the Federal Reserve doesn't want to make that happen.

The Fed held its policy rate steady yesterday and the value of the U.S. dollar declined. By noon on Thursday, the dollar had fallen against the Euro by almost 1%. This behavior is similar to that experienced previously as the Federal Reserve backed off a rate increase.

The international markets would like to see the Fed raise the range in which the Federal Funds trades within by 25 basis points to a range from 50 basis points to 75 basis points.

The Federal Reserve is not listening to these international markets because the value of the U.S. dollar is not one of the objectives of the Fed that was given the central bank by Congress. However, the world seems to want a stronger dollar and for the U.S. to take a greater leadership position in the world. And, when the Fed doesn't step up to take the leadership role the world wants, the value of the dollar falls. Traders would like to see in the near term, for example, the Euro priced in the $1.04 to $1.08 range.

But, this would require the U.S. to do more. In particular, it would mean that the U.S. government would have to be more disciplined fiscally and develop more programs that would help to build the productivity of the economy, starting with infrastructure, energy, health, and education and training. The government would move away from programs aimed at increasing inflation and putting people, once unemployed, back to work in their previous jobs.

In other words, the government needs to concentrate more on supply-side solutions to the current economic situation.

The future economic battles are going to come from Asia, more specifically from China. It seems as if world markets realize this, even though this is not getting big play in the current presidential contest, and it is not getting sufficient play within the U.S. Congress and federal agencies.

Furthermore, the battle of the future is going to come from the competitive productivity of the nations involved.

Since World War II, global competition has grown under an almost uncontested U.S. leadership; a leadership that wanted to see Europe get back on its feet and world trade prosper.

But, now, there is a battle brewing. China is on the rise. The U.S. cannot respond by pumping up money and credit and stimulating financial engineering at the expense of the industrial sector, something it has been doing for at least fifty-five years now.

Deep down, this is what the investor community would like to see in the long term: a strong productive America to take on the rapidly advancing China.

Europe is dropping by the wayside with its sovereignty problems and economic disjunction. Other countries are not yet up to the point where they can take on the leaders. So, it is the U.S. or nothing to contest the Chinese.

This is the new world. The United States cannot conduct its monetary policy to just meet the goals of stable prices and low unemployment, the goals now set for it by Congress.

The world economy is open more than ever and trading markets and financial markets do not let nations remain in isolation. The U.S. is going to have to step up and face the Chinese advancement, or, it is going to have to resign itself to a lesser position. One would hope that the situation would not get to one of crisis before the United States is pushed to move.

But, moving to focus on improving productivity and competitiveness will not be eas,y for it will require that politicians take a longer-term view of the economic scene, something that those needing to run for re-election find hard to do.

Still, it seems as if world markets are hoping that the United States will move in this direction. There is no one else with the strength, capability, or scale to do it.

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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