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Fed leaders can’t keep mum on dollar’s future

An employee of the Korea Exchange Bank counts money next to stacks of one hundred U.S. dollar banknotes at the bank's headquarters in Seoul, Aug. 11, 2011.

JO YONG-HAK/REUTERS

The U.S. central bank is running out of taboos to break. This week, Boston Federal Reserve President Eric Rosengren admitted that the latest quantitative easing broadside would debase the dollar. His counterpart in Minneapolis, Narayana Kocherlakota, traditionally on the hawkish side, said that an above-target inflation rate of 2.25 per cent would be tolerable.

Regional Fed bosses have more leeway to speak their mind than, say, Fed Chairman Ben Bernanke – especially when, like Mr. Rosengren and Mr. Kocherlakota, they're not currently voting members of the policy-setting Federal Open Market Committee. Their pronouncements still carry weight. Mr. Rosengren has a reputation for choosing his words wisely, while the Minneapolis Fed boss is known for vigilance on inflationary threats.

Mr. Rosengren's admission that Fed policy may weaken the dollar provides ammunition to the likes of Guido Mantega, Brazil's Finance Minister. He thinks policies such as the Fed's bond-buying devalue the currencies of the countries undertaking them, hurting the competitiveness of economies like Brazil's – though the dollar isn't currently trading too far from where it was two years ago on a trade-weighted basis.

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Meanwhile, Mr. Kocherlakota's remarks could alarm those who see running the dollar printing presses as feeding inflation. U.S. consumer prices rose a mild 1.7 per cent in the year to August. But the Fed's recent pledge to buy mortgage-backed securities on an open-ended basis has fuelled suspicions that Mr. Bernanke and his colleagues are willing to see prices rise faster than the semi-official target of 2 per cent a year.

Those are the most recent sacred cows to be slaughtered. But Mr. Bernanke has dispatched several since the start of the financial crisis, from the Fed's participation in the bailout of Bear Stearns, to its expansion of emergency lending to banks, and to the launch back in 2010 of a plan to buy $600-billion (U.S.) of U.S. Treasuries – the first round of quantitative easing. The Fed boss's efforts to head off any repeat of the Great Depression have angered many conservatives, in particular the Tea Party faction, something that could yet bring political efforts to curb the Fed's power.

A weaker currency and an increased risk of inflation follow directly from the Fed's war on stagnation. But actually saying so could bring more domestic and foreign brickbats.

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