Navigating Monetary Policy as Headwinds Shift to Tailwinds
Governor Lael Brainard
Federal Reserve, March 06, 2018
Many of the forces that acted as headwinds to U.S. growth and weighed on policy in previous years are generating tailwinds currently. Today many economies around the world are experiencing synchronized growth, in contrast to the 2015-16 period when important foreign economies experienced adverse shocks and anemic demand. The International Monetary Fund revised up its outlook for the world economy in January, continuing a recent pattern of upward revisions, in contrast to a string of downward revisions in 2015 and 2016.2 Stronger economies abroad should increase demand for America’s exports and boost the foreign earnings of U.S. companies.
The upward revisions to the foreign economic outlook are also pulling forward expectations of monetary policy tightening abroad and contributing to an appreciation of foreign currencies and increases in U.S. import prices. By contrast, foreign currencies weakened in the earlier period, pushing the dollar higher and U.S. import prices lower. Since the end of 2016, a broad index of the exchange value of the dollar has depreciated nearly 8 percent, whereas it appreciated by 25 percent from mid-2014 to 2016.
