If the Fed follows through on its forecasts, though, and raises rates faster than markets expect in 2016, the dollar may well rise further, dampening inflation quickly
What is the logic behind this? Thanks :)
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A higher than expected interest rate in the US would result in a higher than expected interest rate differential with other currencies. This will drag more money to the US as investors will try to benefit from this higher interest rate. Moreover, a faster tightening may create the perception that the Fed is more confident about the economic environment. This good news for the US can translate in dollar appreciation.
An appreciated currency makes imports cheaper, which negatively affects inflation.
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1$\begingroup$ When the Fed raised rates more quickly than the markets expected in 1994, it instigated a rout in government bonds. This seems against the logic, isn't it? Were some other factors at play, which caused this? Thanks. $\endgroup$ – q126y Dec 13 '15 at 7:02
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1$\begingroup$ Unfortunately, I don't know the answer to that question. The economist does not seem to adress those factors, since the dollar depreciated in 1994 and they're expecting an appreciation for 2016 in response to a possible rate hike surprise. Nevertheless, it's an interesting remark. $\endgroup$ – Wecon Dec 13 '15 at 7:49
