Weak Inflation

By easing monetary policy further, central banks in Europe and Japan are set to weaken their currencies next year, forcing up the dollar in response, he said in a separate report last month. By doing so they will export their weak inflation to a U.S. which is now a more open economy than it once was.

Hale reckons that the sum of exports and imports in the U.S. is now six percentage points higher than when the Fed last started tightening in 2004. Meantime, U.S. inflation since 2010 has also been more than a third as sensitive to prices in fellow advanced countries as it was in the 1970s, he calculates.

The upshot for Saunders is that even if the Fed does raise rates by the end of next year it will still be “leaning more in the direction of low for longer rather than an early withdrawal of stimulus.”

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