Maury Obstfeld: “Trump’s plans for the Fed and the dollar are a one-way ticket back to the inflationary chaos of the 1970s.”

Maury Obstfeld at PS says it better than I ever did (along with the best graphic *ever*):

Trump’s advisers are reportedly considering two complementary policy changes. One proposal reportedly involves increasing direct presidential control over the Fed’s interest-rate decisions and rulemaking. Simultaneously, Trump’s trade team, led by former US Trade Representative Robert Lighthizer, apparently wants to weaken the dollar’s exchange rate.

While some Trump advisers have denied any plans to devalue the dollar, Trump’s preference for lower interest rates and a weaker currency was evident during his first term. The proposed policies would make it easier for him to override the Fed’s independence and achieve both objectives. The result would be a potent inflationary cocktail.

Trump’s desire for a weaker dollar is driven by his belief, shared by Lighthizer, that the dollar is “too strong.”

My more irreverent take on this subject here, and here.

7 thoughts on “Maury Obstfeld: “Trump’s plans for the Fed and the dollar are a one-way ticket back to the inflationary chaos of the 1970s.”

  1. pgl

    His EconoFact post from 2019

    The U.S. fiscal stimulus owing to the December 2017 tax cuts and subsequent increased government spending contributed to the strength of the economy and the strong dollar. Tapering this stimulus, as the IMF has recommended, would weaken the dollar, but this seems unlikely any time soon. (President Trump and Congress have shown no inclination to reverse the tax cuts passed in 2017 or reduce the levels of spending.

    Gee – what I was saying.

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  2. pgl

    Macroduck noted that Team Trump was touting the 1985 Plaza Accord. Also from his 2019 EconoFact post:

    The one major instance in which foreign exchange market intervention seemed to affect the value of the dollar dramatically and persistently was the September 1985 Plaza Accord – but that experience is not a good model for what might happen today. At that time, the finance ministers of the five largest industrial economies acted together to weaken the dollar. But this was a unique event and has limited implications for the success of intervention policy in general. One important feature of the Plaza Accord was that it was a coordinated effort: all the participants agreed on a weaker dollar, and they coordinated their intervention sales of dollars. Another important aspect was that the dollar had been on a long upswing during which its value rose by more than 50 percent after 1978; most economists viewed some of this appreciation as excessive, given growth and policy fundamentals, and the dollar’s decline had already started about six months before the Plaza action. In this case, markets saw that the dollar still had a long way to fall, and the multilateral meeting at the Plaza Hotel that produced the Accord offered markets a trigger that hastened a sustained decline in the dollar.

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  3. pgl

    “f the past three years have taught us anything, it is that low inflation cannot be taken for granted. Even though US inflation remains above the Federal Reserve’s 2% target for price stability, former President Donald Trump’s advisers are discussing a new and dangerous approach to monetary policy. If implemented during a second Trump presidency, it would undo the decades of hard work that allowed the Fed to reduce annualized inflation by nearly four percentage points since 2022, to roughly 3%, at little or no cost to the real economy.”

    We lowered inflation with no cost to the real economy! This statement of fact is going to set off little Brucie boy and his minnie me Steven Kopits to no end!

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  4. joseph

    Remember when President Trump called up national security advisor Michael Flynn at 3 AM to ask if a strong dollar or a weak dollar was better for the U.S. economy?

    Yeah, for real.

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    1. Ivan

      I know – that is the real danger of a Trump administration. A bunch of idiots executing the reality TV script of a moron.

      Trump cannot stand to listen to someone who is smarter and more knowledgable than he is. In many subject areas that is toddler level – because he doesn’t read or think much about anything but himself. He cannot be educated because the minute you tell him something he did not tell you first, he feel that you are upstaging him and you must go.

      Government is incredibly complicated with large numbers of interacting parameters. The first round of having the Orange Moron in charge avoided a lot of disasters because it’s also like a large ocean liner very hard and time consuming to have it change course. A second round of Trump has a much bigger chance of doing much more damage. Remember that everything Trump runs eventually gets run into the ground.

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  5. James

    A second Trump admin will be chaos and corruption on an unprecedented scale. Trump is promising to pardon and overturn any convictions and judgement against him – at both the state and federal levels – Dictator on day one. Project 2025 loyalists will takeover operations of federal govt – leading to chaos and corruption in every sector of govt. Bannon (Homeland Security); Giuliani (DOJ), The Pillow Guy or Navarro (Commerce), Jared/Ivanka (State Dept.), etc. various other family members and or sycophants will be operating fed govt depts. as their own personal fiefdoms based on Trump approval.
    Also , domestic problems with Trump will be a minor worry when Trump throws NATO/Eastern Europe to his puppetmaster Putin.
    I urge all to watch a Trump rally – what Bush said about Trump inauguration speech – “That was some weird shit.” – does not even begin to describe what he is currently saying.

    Reply

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