You are right that the most direct way to increase the value of the dollar is to balance the budget and pay off our national debt. However, in the world of finance, EVERYTHING is connected. As you correctly stated, the Fed funds rate is a tool to manage the money supply. When the money supply expands, that is the same thing as printing money. The Fed has historically tried to limit growth rate of the money supply (the printing of money) to a growth rate equal to or less than the growth rate of the economy. By doing this, they ensure that they keep inflation in check.
When they keep rates too low and induce money supply growth that exceeds economic growth, they are causing inflation, which is the same thing as saying they are devaluing the dollar relative to other currencies.
Think of it this way. You have a pie and 6 people who want to eat it. If you are a careless pie governor, you will invite 6 more people to eat the pie. 12 people now mean less pie per person.
The economy is the pie. The number of people are the money supply. If the pie isn't growing and the number of people is growing, then there is less pie for everyone. If the economy isn't growing as fast as the money supply, then we are all less wealthy.
When the Fed lowers rates, they are effectively borrowing growth from the future to pay for growth today. So this tool has to be used VERY cautiously. However, investors have become used to the Fed using it as a bailout mechanism whenever the stock market swoons or a large sector, like the finance sector, makes stupid decisions that result in large corporate losses. Bailouts are not what the Fed rate should be used for, especially now with the dollar value being close to worthless on the world currency markets. |
