Goldman to Fed: Stop Worrying So Much About the Stronger DollarBy
The greenback's effect on inflation is `limited,' bank says
Bond market has boosted expectations for consumer price gains
It’s time for the Federal Reserve to end its dollar fixation.
That’s the takeaway from a Goldman Sachs Group Inc. report Wednesday that suggests the U.S. currency poses little threat to the Fed’s inflation goals, challenging policy makers’ comments to the contrary. That’s good news for dollar bulls who are betting on expanded monetary-policy divergence between the U.S., Europe and Japan.
Inflation is at the heart of the Fed’s debate about the timing of interest-rate increases as officials look to normalize monetary policy after seven years of near-zero borrowing costs. With a stronger dollar not translating into significantly cheaper import prices, Goldman Sachs suggests the central bank faces fewer headwinds to hiking rates than markets are currently pricing in.
“The majority of the effects of a stronger dollar on import prices have already been realized,” New York-based analysts Zach Pandl and Elad Pashtan wrote in a note. “Inflation data to date appears to be more closely tracking a path with less dollar pass-through to core inflation” than implied by the Fed’s projections for consumer prices.
Investors agree. The gap between yields on Treasury Inflation-Protected Securities and nominal 10-year notes, known as the break-even rate, climbed to the highest since August earlier this week. The measure indicates inflation will average about 1.58 percent during the next decade, compared with 1.2 percent last month.
The Bloomberg Dollar Spot Index, which tracks the currency versus 10 peers, rose 0.2 percent Thursday, climbing for a fifth day in its longest streak of gains since Jan. 20.
Fed Chair Janet Yellen said after last week’s policy meeting that the strength of the U.S. currency may continue to weigh on consumer prices. Officials lowered their forecasts for price gains this year to just to 1.2 percent, from 1.6 percent previously.
The Bloomberg Dollar Spot Index has fallen 2.6 percent this year, after a 9 percent gain in 2015 and an 11 percent rally the year before.
“Although any pent-up pass-through effects from dollar appreciation remain a downside risk to core PCE inflation, that alone does not appear to be a compelling reason for lower inflation over the course of the coming two years,” Pandl and Pashtan wrote.
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