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.
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.
Editorial on 06/13/2019