Krugman’s blog, 2/15/16

There was one post yesterday, “Strong Dollar Blues:”

Gavyn Davies joins the chorus of those worried that the Fed is in denial about its interest-rate misstep:

It is human nature that they are reluctant to admit that their decision to raise rates in December was a mistake.

But he adds a possibly deeper reason, failure to think sufficiently about the international side:

But I suspect that something deeper is going on. The FOMC may be underestimating the need to offset the major dollar shock that is currently hitting the economy.

Two thoughts. First, there’s a close although not perfect match between what’s going on now and what I warned about a year ago:

So, what’s actually happening? The dollar is rising a lot, which suggests that markets regard the relative rise in US demand as a fairly long-term phenomenon – which in turn should mean that a lot of the rise in US demand ends up benefiting other countries. In other words, the strong dollar probably is going to be a major drag on recovery.

And there’s an even closer match to the worries Lael Brainard expressed about global impacts back in October:

Over the past year, a feedback loop has transmitted market expectations of policy divergence between the United States and our major trade partners into financial tightening in the U.S. through exchange rate and financial market channels. Thus, even as liftoff is coming into clearer view ahead, by some estimates, the substantial financial tightening that has already taken place has been comparable in its effect to the equivalent of a couple of rate increases.

This not-quite-dissent sure sounds pretty prescient now, doesn’t it?

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