As widely noted, President Trump earlier this week tweeted that his trade war wouldn’t cost Americans – it would, he said, be “game over” for the Chinese if the Fed matched efforts he expects by the Chinese to be “pumping money” and reducing interest rates. Many took the tweet to mean that Mr. Trump was reiterating his prior calls for lower rates – not unreasonable since he said so. But the reference to pumping money focuses on Chinese currency values which Mr. Trump has previously asserted are manipulated downward unfairly to boost China’s trade surplus. I think the President not only has his eye on interest rates, but also on the value of the dollar, a value he has repeatedly decried as too high. If it goes higher still – as seems likely – then macroeconomic pressures will boil over and the President will need someone to blame – cue the central bankers.
As with much else, the value of the dollar is a tool to Mr. Trump. Departing here as elsewhere with political and economic orthodoxy, the president has disposed of the principle that a strong currency behooves a strong nation. To him, the value of the dollar is what you get in order to give you something else.
But, just like interest rates, the value of the dollar is proving stubbornly self-determined. Although the Fed wants rates around where it thinks the neutral rate might be found and seeks a dollar in a reasonable range in comparison to a currency basket, broader market and political forces are pushing rates higher and making the dollar stronger. It’s not just that higher rates mean a stronger currency in a strong economy – the usual relationship. It’s now also that looming trade wars combined with geopolitical stress to create significant amounts of emerging-market economic stress. Gone are the days when investors felt comfortable in Turkey, Argentina, or even Italy. Even the Euro isn’t what it was thanks to Brexit, slow growth, and negative rates. Nothing the Fed does affects any of these broader developments, although rising rates either by its hand or, as now, that of the market make all of them still more worrisome.
Mr. Trump’s fiscal policy also drives up rates and thus the value of the dollar. The larger the deficit, the more U.S. Government paper on offer; the more on offer in concert with a trade war and looming government shutdown and debt-ceiling debacle, the more investors demand to persuade them to buy it. Treasury auctions of late have thus been stunningly poor, with analysts pondering why demand is so light that Treasury rates are rising without regard to comparable-maturity paper. With global forces driving down demand for the dollar to prop up lagging currencies, a fiscal-policy glut exacerbates rising Treasury rates. Rates could fall and fall fast, but it would take a flight-to-safety scenario for this to happen and that’s not a happy thing to contemplate
Given all this, the Fed is hard-pressed to cooperate with Mr. Trump on lowering interest rates because underlying, tectonic forces are pushing them up. If Mr. Trump’s trade war sparks inflation – see all the desperate official Fed warnings earlier this week – then the Fed will feel it has no choice but also to raise rates on its own in what may prove an increasingly hopeless effort to restore price stability. Tariff costs combined with a preternaturally strong dollar will be particularly problematic for low-cost consumer goods, making it still harder for the majority of low-, moderate-, and middle-income families to get by without still more debt. More debt at higher rates is of course still more misery, still greater leverage, and an even higher risk of financial instability or worse.
Does Mr. Trump know all this? It’s easy to say that his tweets and statements bespeak economic ignorance, but I believe that’s a dangerous way to dismiss the president. As the 2016 election proved, the president is keenly attuned to distant drums. He not only knows that trouble is on its way, but also how best to exploit it to personal and political advantage.
Which brings one back to the value of the dollar. Mr. Trump’s latest tweets expand his central-bank barrage into a two-sided attack – he wants not only low rates, but also a lower dollar. Knowing he won’t get them and sensing the turn of the business cycle, Mr. Trump won’t give up on the trade war, his demand for still lower taxes, or his occasional flirtations with still more federal spending on favorite programs. Why should he? He will surely say and perhaps even believe that he could have what he wants and America would be the greater for it if only the Fed would play ball.
Mr. Trump also knows that the majority of Americans don’t know what the Fed is other than something very important ensconced in a lot of marble run by some very academic-looking people who talk about the Phillips Curve. Jay Powell is a departure from the last three Fed chairs who conformed to stereotype about this cabal of Wall Street financiers and gnomic central bankers, but the image is firm – indeed, it goes back to the founding of the Fed. Even Americans who don’t share the conspiratorial aspects of the cabal theory generally don’t know what the Fed does and are inclined to view it with considerable skepticism. Indeed, the more the pundits and titans of the moneyed classes back the Fed against the populists and progressives, the less credibility the central bank can muster.
The mysteries attendant to central banking combined with America’s distrust of giant financial edifices give Mr. Trump an open field. Even better for him, the wind is at his back. It’s not unreasonable for many Americans to believe that the president’s radical view of trade, exchange rates, and monetary policy might do something to restore their hope of a secure economic future – nothing the Fed has done since 2010 has profited them. The reality of American economic inequality is finally impinging on the Fed – several of our recent EconomicEquality blog posts make this clear. But the Fed is still deaf to any suggestion that its policies have had anything to do with the vast concentrations of wealth in the hands of fewer and fewer people in just the past eight years. Mr. Trump thus can hit the Fed where it really hurts.