In the wake of the of yesterday's turmoil in financial markets, there was growing talk of the possibility that the Fed may cut interest rates to provide a boost to the economy. Surprisingly, almost no one seemed to note the most obvious way that a rate cut would boost the economy -- through a lower dollar. The biggest imbalance in the U.S. economy at present is its enormous trade deficit. This can only be corrected by bringing down the dollar, thereby by making U.S. products more competitive on international markets. While the dollar has fallen substantially in the last six years, which has boosted exports and cut imports, it recently rallied against the euro and other major currencies. This is a big step in the wrong direction. The Fed would be wise to take strong steps to try to push the dollar back down. A quarter point cut in interest rates would help in this effort. A half point cut would be even better. If foreign central bankers want to hold dollars, we should make sure that they lose lots of money in the process. (WSJ reporter, David Wessel did not mention the dollar in his discussion of a rate cut on NPR.)
--Dean Baker