Fed in delicate juggling act

THE SAVAGE TRUTH Must keep foreign investors and bond market happy

Most Americans haven't noticed yet, but a supermodel certainly has the Fed figured out. When Giselle Bundchen demanded that her modeling contracts be paid in euros, not dollars, she was only expressing the truth made evident by the currency and gold markets this past week: The dollar grows more worthless by the minute.

The dollar is falling in value because there are simply too many dollars in the global marketplace as a result of our borrowings and trade deficit. Even worse, the Fed is making it less attractive to hold dollar investments by cutting interest rates.

There's an old rule in the financial markets: "Don't fight the Fed." The long period of growth in the U.S. economy for nearly 20 years is a testament to the Fed's power. But now the Fed is trapped. It must push rates lower to stimulate our economy. But it also must keep interest rates high enough to attract buyers for all our debt.

For the first time ever, Fed governors must consider not only what's good for our economy, but they must also consider the power of foreign central banks that hold our debt and finance our deficits. Even though lower interest rates would help consumers, business and the entire economy, the Fed is limited in how much it can cut short-term rates and still allow the Treasury to finance our deficits.

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