In a surprising interview with the Wall Street Journal published Wednesday, President Trump turned to two topics that recent presidents have been silent on: The strength of the U.S. dollar and the level of U.S. interest rates.
“I do like a low-interest rate policy, I must be honest with you,” Trump said, when asked if he would consider reappointing Federal Reserve chair Janet L. Yellen to her post after her term is up on Feb. 3.
“I like her, I respect her,” Trump added about Yellen. About her potential reappointment, he said, “It’s very early.”
He also criticized the strong U.S. dollar, saying it stemmed partially from people’s confidence in him but that the dollar’s high value relative to other currencies was also hurting the U.S. economy. A stronger dollar makes the goods that manufactured in the United States seem relatively expensive on global markets, slowing exports.
“It’s very, very hard to compete when you have a strong dollar and other countries are devaluing their currency,” Trump said.
Past presidents have typically refrained from commenting on both these issues — the dollar, for fear of destabilizing global currency markets, and Federal Reserve policy, for fear of upsetting markets or being seen as compromising the independence of the central bank.
“The norm is for presidents to observe the importance of an independent central bank. The norm is for presidents to pay lip service to a stronger dollar, almost as if it’s a point of national pride,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman. “But like so much else about his presidency, he says out loud what other holders of that office have been more circumspect about.”
Since the Clinton administration, the United States has adhered to a “strong dollar” policy in which leaders have defended the value of the currency as in the nation's best interest — when they spoke out on the dollar at all. But Trump has taken a dramatically different tack. He first said in January that the U.S. dollar was too strong and that it was hurting the U.S. economy — comments which caused the value of the currency to plunge before recovering.
The dollar fell again following Trump’s comments on Wednesday. However, few economists say that Trump’s opposition to a strong dollar will moderate the currency’s value in the long run.
The U.S. economy looks much stronger than other major economies, and the United States is one of the only nations where the central bank is beginning to raise interest rates. Higher interest rates would encourage investment to flow to the United States as investors seek higher rates of return, pushing up the value of the dollar.
In addition, some of Trump’s proposed policies are likely to further strengthen the greenback, economists say. Trump has proposed tax cuts and an infrastructure spending plan that probably would further boost the economy and inflation. If enacted, these moves would probably spur the Federal Reserve to raise interest rates more quickly.
“Giving lip service to strong dollar policy had been accepted for 20 years or more,” said Michael Feroli, chief U.S. economist at JPMorgan. “On interest-rate policy, I think it’s tricky, because arguably the third mandate of the Fed is low long-term interest rates. So I don’t think just being a low-interest rate person is a problem.”
Yet Trump’s comments on interest rates do venture into “some gray area,” Feroli said. “I don’t think this is per se a threat to Fed independence, but it’s definitely a little bit different than what we’ve become used to,” said Feroli.
During the presidential campaign, Trump told CNBC that Yellen should be “ashamed” of herself for keeping rates low. His campaign also featured her in an ad that criticized “those who control the levers of power in Washington.”
Yet economists and Fed watchers said Trump’s reversal on Yellen makes some sense. A former labor market economist, Yellen is known for being more attuned to wage increases and has a slightly more dovish reputation for raising interest rates. As a real estate developer who had to take on debt, Trump had previously described himself as someone who “always loved” low interest rates.
Sitting presidents are predisposed to lower interest rates, which naturally boost the economy, said Mark Spindel, co-author of a forthcoming book on the Fed called “The Myth of Independence.” “I think it’s not just that he’s a low-interest rate guy, I think it’s that if you’re sitting in that office, you generally want low interest rates and you are willing to trade off a lower interest rate for a little inflation.”
In addition, markets could be reassured if Trump reappoints the generally well-respected Fed chair for another term. This was the course for previous presidents: Barack Obama chose to reappoint then-Fed chair Ben Bernanke, who was nominated by George W. Bush, and Bill Clinton reappointed Alan Greenspan, who was originally appointed by Ronald Reagan.
“As president, having a steady hand at the controls of monetary policy is better than switching jockeys midrace,” said Greg McBride, chief financial analyst at Bankrate.com.