Will Trump’s Federal Reserve Policies Result In A Weak Or A Strong Dollar? 

Guest Post By Maria Maalouf

President Donald Trump has repeatedly said that he will not fire the Federal Reserve Bank Chair Jerome Powell. But most likely he will remove Mr. Powell from the board of governors of the Fed Reserve. Trumps wants more control from the White House over the monetary policies of the United States Government. This will affect the value of the U.S. dollar and consequently it might drive down the interest rates on the American dollar. Yet, this is not an assured conclusion. A weak dollar as Mr. Trump desires will have many economic implications on the value of the exchange rate of the dollar versus so many countries in the world. It will impact the economies of the countries of the Middle East. It is crucial to analyze first why there is a feud between Trump and the chairman of the Fed Reserve Bank.

Trump felt during his Presidential campaign that Jerome Powell was trying to help Biden and later Harris get elected. He raised the interest rates on the dollar. Biden and Powell printed many dollars or greenbacks. Supply chains are still slow. The supply is little and the demand is big. As a result, inflation kicked off in the U.S. economy. It is still hurting the budgets of the American households. Raising interest rates was one way to increase bank deposits and stop the inflation trend.

It is expected that interest rates will go down when Trump assumes office. This will boost economic growth and lead to more business expansion inside the United States and perhaps all over the world. It will make American exports more competitive abroad. Many countries can gain as well because their imports of American goods, commodities, and services will not be too high for their local currencies. This is a very sound economic vision which President Donald Trump entertains.

However, other economic factors will not make it that simple for Trump’s forcing the Fed Reserve Bank to have more circulations of the American dollars among consumers and businesses to spur economic growth. The first item is the proposed tariffs on Chinese goods coming to the U.S. If this happens, more countries can buy these Chinese goods. This will increase the demand on the Euro, the Japanese yen, or the Chinese Yuan. The demand on the dollar will not be high. Hence, to make the dollar attractive again, hiking interest rates could be one possibility.

In addition, interest rates on long-term loans such as home mortgages and cars may not go down because they are not set up by the Fed. However, Trump’s economic policies could attempt also to lower these long-term interest rates. This would be a serious development in the U.S. economy.

The second element of Trump’s monetary policies is the degree of the willingness of other countries to buy U.S. Treasury bonds, invest in America, and buy dollars from the international financial markets to facilitate so many economic transactions they do. President Trump will have no control over the economic decisions of other countries on how much use of the U.S. dollar they will have in his next four years as the U.S. President from January 2025 till January 2029. Many Arab countries have been investing heavily in the U.S. real estate markets. President Trump can encourage them to continue doing so. This will be an economic success for him. It will keep the demand on the dollar high.

If there is a global recession as a result of a potential trade war between the United States on the one hand, and China, Canada, and Mexico, on the other hand, this will weaken the demand on the dollar. The United States could be seen as a protectionist nation. Protectionist policies can modify the price of the dollar by leading it to depreciate. If imports are lowered, and there are trade barriers at least with China, the Trump Administration could either produce these banned goods domestically or might import them from other countries. If the United States buys them from other nations than China, more countries will have a bigger size of their U.S. dollar reserves. This will reduce the value of the dollars versus many other foreign countries. If these goods are manufactured inside America the interest rates will be low because banks will lend money to businesses at a small discount to push more economic activity and production.

Significantly, Trump’s dollar policies will be tied also to his immigration policies. If he begins the forcible deportations of hundreds of thousands of illegal immigrants, this will mean more vacant houses and apartments available. Many American families may request bank mortgages to buy more housing properties. The logic in this economic case is to have lower interest rates on the mortgages to stimulate more selling and buying in the housing markets. This could be beneficial to an extent because if the demand is too high to buy the typical 30-year mortgage, raising interest rates on the U.S. dollar could be the only logical option to decrease an excessive demand on mortgage loans. This economic aspect is for President Trump to deliberate and decide.

In conclusion, the dispute between President Trump and the Chairman of the Federal Reserve Bank Jerome Powell is reflective of which value will the U.S. dollar acquire. It is expected to go down but it could go up. It is not a win-win situation for President Trump. He must measure his dollar policies against the backdrop of his trade policies, especially versus China, and his immigration policies against those countries that allow illegal immigration inside America.

By Maria Maalouf
https://www.thecapitolinstitute.com/