Question

1) How will a lower Fed Funds Rate affect the value of dollar relative to other countries, assuming the US inflation rate doesn’t change? How will the value of dollar change if other countries’ central banks take the same action?

2) What are some of the concerns policy makers may have regarding a further decrease in the Fed Funds Rate at this juncture?

3)Why is a wholesale flight out of the dollar unlikely in the immediate future?

Answer 1

1.FED cutting Fund rates,keeping other factors like inflation constant, The value of dollar goes down as it becomes unattractive as people are being offered with less interest rates.

If other countries cut fund rates, Dollars becomes attractive again in comparison to them as it is offering a high rate of interest in their comparison and investors are lured into buying dollars.

2.Policy makers are worried as they are not left with much rate cuts and there is an impending recession .They need to stimulate the economy and demand, with furthur rate cuts and they donot have much room for rate cuts as they have been cutting rates all along 2019.

3.Wholesale fight out of dollars is unlikely as it is providing as a secured bet in such uncertain times when the demand in global economy is shrinking . Dollars is gaining strength as every other currency is falling and it is providing a stability in such tough times.