President Trump’s latest appointee to the Federal Reserve will face the challenge of maintaining the dollar’s international status while rebalancing US trade.
President Trump has advanced Stephen Miran, the current chairman of the president’s Council of Economic Advisors, for a seat on the Federal Reserve (Fed) Board and also possibly a replacement for Fed Chair Jerome Powell should he resign or when his term ends next year. With the attempted firing of Governor Lisa Cook, there is still more room for White House influence at the Fed. Cook’s replacement is far from clear. However, Miran’s preferences are definite since he has left a broad paper trail.
To read what Miran has to say is to realize, in the first instance, that he has thought deeply about the relationship between trade, currencies, and the role of monetary policy, and that he has done so in sometimes unorthodox ways. Whether one agrees with him or not, his presence at Fed meetings would offer a welcome and refreshing change for a body that has, for too long, relied on well-worn, conventional economic perspectives. If fresh thinking is always welcome, his presence would nonetheless make Fed policy less predictable and, accordingly, sometimes cause disruptions in financial markets.
The most disruptive perspective Miran would bring to the Fed is his desire to dethrone the dollar from its long-standing role as the world’s premier reserve currency—the currency used in most trade contracts, whether or not an American is involved, and the currency of choice for the world’s governments, central banks, international businesses, and investors to hold their international financial reserves.
Miran claims that the demand for the dollars implicit in such arrangements has kept the greenback’s foreign exchange value inordinately high, distorting US trade by making American products uncompetitively expensive on global markets and foreign products cheap to Americans. The trade imbalance that resulted, in Miran’s telling, has driven production out of the United States, cost American jobs, and created an unsustainable economic and financial situation for this country and for global trade.
Miran argues that in the past, America could cope with this distorting situation because the US economy was overwhelmingly dominant. That, however, is no longer the case. He notes, for instance, that the US gross domestic product (GDP) as a portion of the global total has fallen by almost half from 40 percent in 1960 to 26 percent in 2023.
The trade deficit of imports over exports created by the dollar’s overvaluation has risen from $2 billion surplus in 1970 to $918 billion in 2024, 3.1 percent of US GDP. Perhaps most telling of the unsustainability to which Miran refers is that the overvalued dollar enables the country to consume some 30 percent of world output when America’s share of global economic output is 26 percent.
Miran highlights yet another unsustainable burden imposed by these arrangements. Because foreign countries and investors often hold their dollar reserves in the form of US Treasury bonds, the ensuing foreign demand has allowed Washington to borrow more cheaply and easily than it otherwise could, tempting the government to pursue less-than-prudent fiscal policies for years. Not only has this fiscal largesse encouraged Americans to consume more than they produce, but by allowing ever larger budget deficits year after year, the nation’s public debt burden has expanded from a manageable 35 percent of US GDP in 1970, for instance, to an unsustainable 120.9 percent at last count.
Dethroning the dollar from its reserve status, whether quickly or gradually, will not be easy. Miran proposes two means to accomplish the task, both of which are dubious instruments at best. One would be instructing the Treasury to engage in overt currency manipulation. This would include selling dollars on global markets to reduce their value or imposing fees on foreigners holding US Treasury debt.
The other option is to seek international cooperation, such as occurred under the 1985 The Plaza Accord and the 1987 Louvre Accord, when the major economies of the world—then the United States, France, Germany, Japan, and the United Kingdom—worked together not to dethrone the dollar but to bring down the greenback’s foreign exchange value in an orderly way and so ease pressures on the global trading systems.
Miran’s suggested unilateral actions seem unlikely to pass muster with the rest of the administration or Congress. They would certainly fly in the face of past practice and might even be illegal. Nor is he likely to get the international cooperation he seeks in what he fancifully refers to as a “Mar-a-Lago Accord.” After all, the major currency holders and traders today, unlike the 1980s, are not US allies. They are Middle Eastern and Asian powers, most notably China, none of which have a significant interest in helping the United States achieve a sustainable balance in global trade and currency arrangements. Indeed, Beijing is eager to wreck the current trading system and leave US arrangements in disarray.
Possibly the biggest impediment to Miran’s plans on the dollar is his sponsor, President Donald Trump. Trump very much enjoys the power afforded him by the dollar’s premier reserve status even as he chafes against its constraints. It allows him to pressure other countries, for instance, by threatening to cut off their access to American banking and thereby disrupt global trade arrangements.
The buying power of a strong dollar makes American tariff threats more credible to foreign leaders who oppose the president. However much Trump may want to move toward more sustainable trade and currency arrangements, it is highly doubtful that he would relinquish the diplomatic, financial, and economic power afforded to him by the dollar’s premier reserve status.
The bottom line then is that as Fed governor or chairman, Miran would be hard-pressed to implement his full program. Having said this, however, knowing what he would like to accomplish should give bankers, investors, policy makers, and journalists a better notion of what will guide his decisionmaking at the Fed and hence how he and the Fed will respond to other issues at the margins of the larger dilemmas of trade balances, international exchange, and US debt
Source:https://nationalinterest.org/feature/donald-trumps-federal-reserve-dilemma