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MORE INCOME
FOR YOU.
RISING STARS
FOR ISRAEL.

Economic Forecast

A stronger dollar, falling interest rates
and perhaps a growth in wages.

T

he U.S. dollar has appreciated
sharply since the end of 2013,
gaining 15 percent against the
Euro, 13 percent against the Japanese yen
and 11 percent against the Canadian dol-
lar.
Driving the U.S. dollar's appreciation are
dissimilar polices taken by central banks
and divergent paths of economic growth.
The Federal Reserve (Fed) ended its
quantitative easing policy and is signaling
a rise in interest rates in 2015. Meanwhile,
the European Central Bank
(ECB) is initiating a bond
buying program; the Bank
of Japan (BOJ) has already
engaged in massive mon-
etary expansion; and the
Bank of Canada lowered
interest rates amid the oil
slump.
Lower interest rates
abroad make the U.S.
dollar stronger. Both the
ECB and BOJ are fighting
deflationary pressures that remain acute
as economic momentum has slowed.
The U.S. remains a bastion of economic
strength amid the uneasy world economy.
The World Bank and IMF recently down-
graded economic growth in developed
economies, except for the U.S.
A stronger dollar has positive and nega-
tive implications for the U.S. economy.
On the positive side, imports will be
less costly — the cost of European and
Japanese products goes down, travel
abroad is less expensive, and energy and
raw material cost less. On the other hand,
exports are more expensive as prices rise
for American goods abroad and travel to
U.S. from Europe will be more expensive.
The dollar's appreciation is bad news
for GM's Cadillac sales in the U.S. The
German luxury manufacturers (BMW,
Mercedes and Audi) are exporting more
vehicles to the U.S., offering sales incen-
tives and making once optional features
standard to take advantage of the dollar's
appreciation against the Euro. Expect GM
to increase incentives on the Cadillac to
offset that advantage or to make further
price cuts.
Canadian shoppers may make fewer
trips to Metro Detroit due to higher U.S.
prices. Incentives will be necessary to
draw them back to U.S. stores.

Fall In Long-Term
Interest Rates
In economic circles, the consensus in
2014 was that improved U.S. growth and
reduced monetary stimulus would result
in higher interest rates. Growth did accel-
erate and the Fed ended quantitative eas-
ing. However, interest rates decreased. The
30- and 10-year Treasury rates declined
respectively to 2.49 percent and 1.92 per-
cent on Jan. 12, 2015, from 3.96 percent
and 3.04 percent on Dec. 31, 2014.
The decline in U.S. interest rates
is due to robust demand globally
for safe securities in a destabilized
geopolitical world and the fall
in inflationary expectations. As
inflationary expectations decline,
investors accept lower nominal
interest rates because the purchas-
ing power of money will not be
eroding as rapidly.
Lower oil and commodity
prices will lead to lower inflation
in 2015, and investors seem to
think that lower inflation will persist. The
five-year forward inflation expectation
(2019-2024) has fallen to 1.98 percent
from 2.81 percent. Historically low long-
term interest rates may be here for many
more years.
Lower interest rates will boost the
residential real estate market by making
housing more affordable and will also con-
tinue to fuel automobile sales. Whirlpool,
Masco, General Motors, Ford and Chrysler
are Michigan businesses that benefit from
lower interest rates. For homeowners con-
sidering a mortgage refinance, now may
be the time to do so.
Lower inflationary expectations and
declining long-term interest rates create a
dilemma for the Fed. If global growth con-
tinues to be challenging, inflation slows
and wage growth is muted, the beginning
of interest rate hikes by the Fed for 2015
would likely be deferred.
Looking ahead, I expect the U.S. dollar
and interest rates to stabilize by the second
quarter of 2015, and that wage growth
will begin. I suspect the Fed may increase
interest rates beginning in June.

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Jonathan Silberman is a professor of econom-
ics at Oakland University. He writes a monthly

column on the economy for the JN. You can
contact him at silberma®oakland.edu.

The Hebrew University of Jerusalem

RESEARCH ENGINE FOR THE WORLD. ENGINE OF GROWTH FOR A NATION.

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JN

February 12 • 2015

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