Washington's economic intelligentsia are having the vapors Friday morning as President Trump is tweeting about Federal Reserve policy and the strength of the U.S. dollar in international markets. He's annoyed that the Fed is raising rates and that the stronger dollar is making our exports less competitive.
Yet both his tax cuts and trade war are contributing to these dynamics. You juice the economy at full employment with a deficit-financed, $2 trillion tax cut, and the Fed's naturally going to ramp up their concerns about overheating. At the same time, the extra fiscal impulse is leading to stronger U.S. growth, relative to that of our trading partners, and that, too, puts pressure on both the dollar and the trade deficit. Meanwhile, tariffs tend to reduce the circulation of dollars in foreign exchange markets, yet another pressuring factor of the value of the greenback.
MarketWatch's index of the value of the dollar against a basket of foreign currencies shows the dollar beginning its most recent appreciation around when the first salvos of the trade war hit. Relatedly, as Trump's tweet mentions, the Chinese yuan is falling sharply against the dollar, down about 7 percent since April, a movement that directly offsets that same amount of Trump's tariffs.
In other words, the president has a point. But while part of this is what he gets from inheriting a strong economy — something I suspect he wouldn't trade — part of it is because of his and his party's actions.
Is it really so bad for him to talk about currency values and jawbone the Fed? Regarding currency, I've long thought the view that high-ranking U.S. officials must always pretend to be for a strong dollar, no matter what, is both foolish and inconsistent with basic economics. (I know they're pretending, because I've talked to some of them about it.) Unless we're willing to go back to the fixed currency exchange rate world of yesteryear, floating exchange rates should adjust to market conditions. Which is, as I've noted, precisely what the dollar has been doing (though Trump did succeed in talking it down half a percent Friday).
The Fed is different, as its independence from politics is so vital. There are many sad examples of countries whose economies did a lot worse than they should have because their central banks became an arm of the government.
That said, I really wouldn't want to see Trump ratchet up his Fed critiques to a regular feature of his daily rants. But as a congressman once told me: "Let me get this straight. I can talk about sending the nation into war, but I'm not supposed to comment on interest rates?!" The Fed is created by the government, and its decisions have profound effects on people's economic lives. It is essential that those decisions be free of political pressure, but I'm not convinced that that fact should always and everywhere insulate it from any commentary by elected officials.
So, if you’re listening, Mr. President, no point in whining about a currency appreciation to which you’re contributing. Whine as you might, you can’t have a “great economy” closing in on full employment, an independent Fed, a big tax cut, a trade war — and a falling dollar.
Jared Bernstein, a former chief economist to Vice President Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of “The Reconnection Agenda: Reuniting Growth and Prosperity.”