An old debate looks poised to make one of its frequent comebacks: How much, if at all, should the Federal Reserve concern itself with the value of the dollar? Oddly enough, it’s a question on which President Donald Trump and Senator Elizabeth Warren seem to agree.
This week Warren proposed “aggressive intervention on behalf of American workers” and, in particular, “more actively managing our currency value to promote exports and domestic manufacturing.” Trump would doubtless approve. He has often complained about the strength of the currency and criticized Fed Chairman Jay Powell for keeping its value too high with tight monetary policy: “We have a gentleman that likes a very strong dollar in the Fed,” the president said in March.
It’s surprising to see Warren endorsing this idea. Up to now, in the race for the Democratic nomination, she has positioned herself as detail-oriented and interested in specifics. Not in this case: She briefly complains about the currency manipulation supposedly undertaken by other countries, and proposes active management of the dollar as the remedy. But she doesn’t say what this would mean.
In practice, it would require the Fed to cut interest rates to drive the dollar down — just as Trump advocates. There are two problems with this. First, it’s precisely the policy that the U.S. has rightly criticized other governments for following in the past. Second, and more important, the Fed is tasked to control inflation, not the value of the currency, and with its primary policy instrument — interest rates — it can do, at most, only one of those things.
True, if the Fed cut interest rates, as many investors expect it to this year, that would likely push the dollar lower. This in turn would help stimulate the economy by making exports more competitive and imports more costly. But the rationale would have nothing to do with the dollar’s exchange rate. Rather, judging whether a rate cut makes sense requires the Fed to ask whether the economy needs stimulus — that is, whether extra demand would boost output and employment without risking higher inflation.
The U.S. has rightly prevailed on other countries not to manipulate their currencies, and to support a rule-based order that frowns on the practice. Strengthening that order would make better sense than taking further steps to dismantle it. When it comes to monetary policy, the Fed should be left alone to make its judgment about macroeconomic conditions, unburdened by an additional objective that would make its difficult job impossible.