In The Wall Street Journal of April 25, Ronald McKinnon of Stanford proposed “raising the fed funds rate as much as necessary to strengthen the dollar.” McKinnon’s argument had little to do with inflation, so he could just as well have asked the European Central Bank to lower interest rates as much as necessary. Yet he just asked the U.S. to “cooperate with foreign governments to halt and reverse the appreciation of their currencies against the dollar.”
McKinnon’s main argument for raising the fed funds rate is because he imagines that “foreigners are disinvesting from private U.S. assets.”
Net foreign purchases of U.S. stocks in the fourth quarter were $55.6 billion. Net foreign purchases of U.S. corporate bonds were $39.1 billion. Foreign direct investment in the United States increased by $39.9 billion in the fourth quarter, following an increase of $101.3 billion in the third.
There will surely be a good argument for raising the fed funds rate, sooner or later, but an exodus of foreign investment is not it.