President Donald Trump fired his opening salvo across The Federal Reserve’s bow by saying Wednesday night that the dollar was getting too strong and interest rates should not get much higher.
Fed chief Janet Yellen and her fellow governors have been jawboning for at least three rate hikes in 2017.
“I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting — that will hurt ultimately,” the President told the Wall Street Journal. “Look, there’s some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good.”
The trouble with King Dollar policy, which says a strong dollar is ultimately good for the US economy, is no longer meaning that the US has a strong economy.
Dollar strength is a by-product of currency manipulation by other nations by devaluing their currency. It’s all laid out in Jim Rickards’ “Currency Wars” book.
As the President said, “It’s very, very hard to compete when you have a strong dollar and other countries are devaluing their currency.”
I believe that the best barometer of the US economy is the 10-year Treasury rate plotted against the Gross Domestic Product. That ratio should be close to 1.
As we have seen over the last month, the 10-year has moved from 2.6% to 2.2%, which is still too high as 2017 Q1 GDP estimates are 0.6% according to the Atlanta Fed’s GDPNow forecast. The first look at Q1 GDP will come out at the end of the month.
The divide between these two measures must correct itself in the short-term, which means bond yields must come down since GDP will not soar as the US consumer has pulled back spending. That spending accounts for nearly 70% of GDP.
As Yellen tenure as Fed chief is about to expire, Trump’s words on rate rises should get the central banker’s attention. As I have written in January, the Fed will have a “one and done” rate rise in 2017, unless the White House can get its tax-cut policy enacted.