I had the privilege of talking with Scarlet Fu and Joe Weisenthal on Bloomberg TV. They gave me an opportunity to discuss my big picture view of the dollar and the Obama dollar rally. While the Reagan dollar rally was driven by the policy mix, and the Clinton dollar rally was driven by the tech bubble, the Obama dollar rally is being driven by monetary policy divergence.

Divergence itself has a bit of a history. The first phase was about what other countries were doing, namely easing policy. The second phase, the Fed tightens while others are easing. That is the phase that was entered in December. I anticipate a third phase when other countries get done easing, and the Fed is still engaged in a tightening cycle. 

We discuss the outlook for Fed policy. I suggest 2-3 hikes in 2016, but that the Fed may allow some maturing bonds to mature and not replace them, which may also serve to remove some monetary accommodation. This could be reasonable substitute for a rate hike.

Lastly, we talked about the different inflation measures in the US and the challenge for international comparisons. I try to explain why the Fed targets the core rate of inflation, and how headline inflation converge to core inflation (not the other way around). I note that provided the labor market continues to improve, the majority of the Fed will be “reasonably confident” that inflation will move toward the target. They gave me an opportunity to discuss my big picture view of the dollar and the Obama dollar rally. While the Reagan dollar rally was driven by the policy mix, and the Clinton dollar rally was driven by the tech bubble, the Obama dollar rally is being driven by monetary policy divergence.

Divergence itself has a bit of a history. The first phase was about what other countries were doing, namely easing policy. The second phase, the Fed tightens while others are easing. That is the phase that was entered in December. I anticipate a third phase when other countries get done easing, and the Fed is still engaged in a tightening cycle. 

We discuss the outlook for Fed policy. I suggest 2-3 hikes in 2016, but that the Fed may allow some maturing bonds to mature and not replace them, which may also serve to remove some monetary accommodation. This could be reasonable substitute for a rate hike.

Lastly, we talked about the different inflation measures in the US and the challenge for international comparisons. I try to explain why the Fed targets the core rate of inflation, and how headline inflation converge to core inflation (not the other way around). I note that provided the labor market continues to improve, the majority of the Fed will be “reasonably confident” that inflation will move toward the target. 

Here is the Cool Video: