An NYT article reports on how plunging house prices are starting to slow consumption. At one point the article refers to the country's trade deficit and comments that the decision by foreign investors to turn away from the United States could send the dollar plummeting "forcing the Fed to raise interest rates." This is not true. The Fed would have the option to let the dollar continue to fall until it reached a price at which investors were willing to hold it. The Fed is no more "forced" to raise interest rates in response to a falling dollar than it is to lower interest rates in response to a weak economy. In both cases the Fed will consider it options and then use its judgment to determine where to set interest rates. It is important that the public recognize that raising interest rates in response to a falling dollar is a policy choice. It is not required by events.
--Dean Baker
