Lake 3054,

The Federal Reserve System has been contemplating to reduce the rate of interest for some time now. For this, they propose to engage in open market operations that involves the purchasing of government bonds by the Fed. This puirchase results in an increase in the demand for bonds and that results in an increase in their price which, in turn, entails in a reduction of their yield which in effect is the long term rate of interest. The rationale for this is to increase the demand for investments and housing that will encourage growth and all the good things that this entails.

The decrease in the rate of interest here, however, discourages foreign firms from leaving the revenues they earn from their exports to US in American banks and ,therefore, the demand for dollars declines which, in turn, results in a depreciation of dollar in terms of foreign currencies. Now the price of imports in terms of dollars may increased and so does foreign travel. Whether the prices of imports will increase it depends on a number of factors and I will not be surprised if the foreign manufacturers decide to keep the prices unchanged so the demand for their products will not suffer.

But this has nothing to do with the price of the stock. We pay in dollars when we buy and receive in dollars when we sell. Also the price of the stock is not a hedge against inflation as you insinuate. In fact, if there is an expected inflation, the rates will increase and this will result in a recession and the stock market will decline. This is typical responce. As a matter of fact, prices are pretty much stable in September without food and energy and if you include these two classes the consumer price index inceared by .01 of one percent.

Therefore, nothing has changed if you look at things from our domestic market point of view. Therre is not any reason why any adjustment has to take place because of the devaluation of the dollar. In the domestic market you still buy the same amount of goods since their price has not changed.