On most fronts, the Trump era is off with a bang — both upsetting the status quo, but also offending numerous Austro-libertarian free market principles. Particularly, there is growing tension within the spheres of monetary and regulatory policy. Those who made themselves comfortable in the Obama administration are swiftly being uprooted by a new narrative in the Eccles Building.
The Trumpians — including Treasury Secretary nominee Steven Mnuchin — have been pushing a “too strong dollar” narrative. Trump himself is pushing the same idea:
Mr. Trump said the U.S. dollar was already “too strong” in part because China holds down its currency, the yuan. “Our companies can’t compete with them now because our currency is too strong. And it’s killing us.”
The yuan is “dropping like a rock,” Mr. Trump said, dismissing recent Chinese actions to support it as done simply “because they don’t want us to get angry.”
On the other side, the story at the Fed is that we are now in a rising interest rate environment. Yellen herself is talking up a “strong dollar” policy via both Fed Funds hikes and also addressing the Fed balance sheet.
In effect, then, Yellen and Co. are jawboning the dollar upward while those on Team Trump are talking it lower. There’s a clear collision here, between the Fed and the White House. This brings us to Yellen’s congressional testimony Tuesday and Wednesday of this week. Bloomberg lists a few important topics that will likely be discussed at the hearings: balance sheet plans, the Dodd-Frank Act, and even Yellen’s future at the Fed. On each of these, the coming clash between the Trump narrative and the Obama-era cohorts is obvious.
Yellen will continue to talk about monetary policy “normalization” (which means policy lunacy, just at a slower rate) and she will defend the Dodd-Frank regulations. Meanwhile, Trump will continue to push for a weaker dollar, Dodd-Frank repeal, and a Trump-friendly Fed board. Yellen’s term expires next February — which gives her one year to accomplish her goals, assuming the probability that Trump will seek a replacement for her as Fed Chair.
There’s a showdown brewing between the current Fed and the Trump administration. To go to even greater lengths to push the dollar down would be to prolong the capital-draining nature of bubble economics; to reverse policy and address the balance sheet or more aggressively pursue higher interest rates would be to prick the bubble.
