How the Rising Dollar Will Affect the Economy

Former Fed member Lyle Gramley has been running the numbers on how the rising greenback will affect inflation and economic growth. The short version: It means the Fed will stay on hold this year. Here is how Gramley puts it:

What the simulation indicates is that real GDP growth between now and the end of 2009 will be reduced by about one-half percentage point, while the inflation rate will be reduced by a little more than one-quarter percentage point.... Coming at a time when economic growth is expected to be sluggish at best, losing half a percentage point because of the dollar's rise is not welcome. And while the reduction in the inflation rate is small, it is occurring in the context of falling oil prices, moderation in rents—which are one-third of the consumer price index—and increasing slack in labor and product markets.... For Federal Reserve policy, the dollar's rise weakens further the case for raising interest rates to deal with the current inflation problem. The hawks on the Federal Open Market Committee are being increasingly isolated. The chances of any Fed move to increase interest rates before some time next year have, in my view, declined to practically zero.