On Thursday, President Trump again violated the postwar taboo of presidents making public commentary on monetary policy. He also violated a taboo that even he has not previously broken: publicly noting that a “strong dollar” is not necessarily in the interests of the United States.
As is frequently the case with Trump, some of what he said doesn’t make sense. And essentially all of it is opportunistic and generally inconsistent with the views he expressed when Barack Obama was president.
All that said, he’s basically right.
Trump calls for lower interest rates
The president’s basic argument is that while a “strong dollar” sounds good and to some extent reflects good things that are happening, it’s also bad for American companies that compete in global markets because it makes American-made products more expensive relative to foreign-made ones.
The solution, in his view, is that the Fed should cut interest rates more aggressively.
As your President, one would think that I would be thrilled with our very strong dollar. I am not! The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing,.....— Donald J. Trump (@realDonaldTrump) August 8, 2019
....John Deere, our car companies, & others, to compete on a level playing field. With substantial Fed Cuts (there is no inflation) and no quantitative tightening, the dollar will make it possible for our companies to win against any competition. We have the greatest companies...— Donald J. Trump (@realDonaldTrump) August 8, 2019
....in the world, there is nobody even close, but unfortunately the same cannot be said about our Federal Reserve. They have called it wrong at every step of the way, and we are still winning. Can you imagine what would happen if they actually called it right?— Donald J. Trump (@realDonaldTrump) August 8, 2019
The financial press offered a number of criticisms of this logic, and rightly so.
Paul Krugman, for example, notes that while Trump claims to want a weaker dollar, he “celebrates the capital inflows that keep it strong,” meaning he cut corporate taxes to encourage foreigners to invest in the United States and loves to brag about the strong stock market.
Maybe I missed it, but how many econo-tweeters have noticed that Trump both bemoans the strong dollar and celebrates the capital inflows that keep it strong? pic.twitter.com/NktskKVaJS— Paul Krugman (@paulkrugman) August 8, 2019
Politico’s Ben White notes, by the same token, that it’s hardly the case that the Fed unilaterally controls exchange rates, so there’s something misguided about expecting them to address this exact issue in this way.
The Fed does not control the dollar. Also interest rates are not high. Otherwise, spot on. pic.twitter.com/fqtp4wm1sA— Ben White (@morningmoneyben) August 8, 2019
This is all true. Trump would make a poor economics instructor and seems to have a weak grasp of exactly how these various issues connect. What’s more, he hypocritically spent the Obama years whining that the Fed was making the dollar too weak.
But his basic point is right: Interest rates are too high and the Fed should be cutting them more aggressively.
The basic metrics say rates are too high
At the end of the day, this is pretty simple.
Low interest rates are nice because they make it cheaper for people to buy houses or for businesses to invest in new buildings or machinery. All else being equal, it’s better to have more of that stuff going on than less, so low rates are nice to have. The problem is that if you keep rates too low for too long, you might have inflation.
But do we have inflation? We do not.
The Fed is supposed to target an inflation rate of 2 percent. The actual inflation rate is below that, and it’s been below 2 much more than it’s been above 2 in recent years.
That’s a strong case for a rate cut. Of course, you have to consider future inflation and not just what happens to be going on this month.
But as you can see in this exciting Cleveland Federal Reserve chart, expectations have changed. A year ago, financial markets were expecting to see inflation in their future (the green line), but by June those expectations had collapsed (the orange line), and in July expectations for the next five to 10 years fell even further (the blue line).
That is, again, a good reason for the Fed to take fairly decisive action to bolster the economy — in terms of both rate cuts and how it talks about those rate cuts.
It’s true that the impact of this on exchange rates is a little bit ambiguous because we can’t predict what else will happen in the world (including at foreign central banks). But fundamentally, it would bolster the American economy (and therefore Trump’s reelection prospects), and Trump is right to say it would be a good idea.