Myopic Fed?

I have written before about our Federal Reserve Bank's narrow focus ... see: A Few Observations. It's Congressional-directed mandates, low unemployment and 2% inflation, are only domestic goals ... and these mandates are currently being met. Left in the lurch are what effects the Fed has internationally. In particular, the Feds push to increase interest rates and reduce its balance sheet, although good and noble goals, are seriously complicating Trump's current trade strategies and negotiations.

The U.S. ten-year bond yield, at about 2.9%, is well over two percentage points above the rest of the developed world. This pushes up our dollar and disadvantages out exporters. China, having a centralized planned economy (no independent central bank) has enormous latitude in manipulating its currency ... which it does. It even has devalued its currency to give its exporters a huge advantage.

In fact, if Trump imposes tariffs on all $500 billion of Chinese goods (as he is currently threatening), China might devalue once again. And this is the reason that the U.S. is somewhat hamstrung in dealing with Xi ... and why Trump is currently tweeting about his opposition to the Fed continuing to raise interest rates tight now  ... in the midst of our fighting these trade wars around the globe.

Basically, yes, the Fed should raise interest rates to give itself ammunition to fight our next economic downturn ... but maybe not just now. Possibly, Congress should expand the Fed's mandate to deal also with international trade and currency goals ... particularly when it has achieved, as it has now, its domestic objectives on the employment and inflation fronts.

Afterward: China has one more way of pushing up the US. dollar. It can start selling off i ts large holdings of U.S. debt ... which would drive down prices and drive up yields ... and strengthen the dollar further. Of course China would have to take a financial haircut i n the process. But it i might be willing to pay that price if things get hot between us.