Over the last several years, America’s imbalances in trade and other global transactions have worsened dramatically, requiring billiions in borrowing

A Weak Dollar and the Fed Published: August 8, 2007

Despite the Federal Reserve’s stay-the-course message yesterday, investors are betting on at least one interest-rate cut by January, intended to quell turmoil in the markets and to juice the slow economy. But with the dollar also weak — recently hitting its lowest point in 15 years against an index of other major currencies — the Fed may be reluctant to oblige.

A declining dollar is a source of inflationary pressure because it can boost the cost of imports. So if the Fed tried to rev up the economy with a rate cut at the same time the dollar is falling, it could end up provoking even more inflation. That would be a drag on economic growth rather than a boost. In an extreme case, it could result in a toxic combination of weak growth and high prices that is a central banker’s nightmare.

How did the Fed lose room to maneuver? The answer is rooted in the Bush administration’s misguided economic policies.

Over the last several years, America’s imbalances in trade and other global transactions have worsened dramatically, requiring the United States to borrow billions of dollars a day from abroad just to balance its books....