Washington embraces strong greenback to ease inflation

Bloomberg

The surge in the dollar this month to its strongest levels in decades has won a tacit endorsement from Washington, offering little official restraint to the currency in a notable shift from past occasions.
Congressional hearings with key policy makers including Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have seen barely a mention of the greenback’s gains, even as it hit the highest against the yen since 1998 and strongest versus the euro since 2002.
By contrast, past episodes of dollar appreciation spurred moves by lawmakers such as a bipartisan push for a currency-oversight bill in 2013, and comments of protest from the administration of the day — most famously, when former President Donald Trump demanded the Federal Reserve help weaken the exchange rate.
The fastest US inflation rate in more than a generation means it’s different this time. Even as economists see limited help from exchange-rate appreciation in bringing consumer prices under control, policy makers have largely endorsed the strong dollar. That may continue until the American economy turns.
“It’s definitely something that we talk to the president about — he’s very interested in the dollar,” White House Council of Economic Advisers member Jared Bernstein said.
US currency policy is housed in the Treasury Department, and Yellen hasn’t been as explicit as some others in President Joe Biden’s administration in her remarks. But she has struck a notably different chord on the greenback than during her long career at the Fed.
While serving in Fed leadership positions, including as chair, Yellen tended to highlight the downside for US growth from a strengthening dollar, and the upside from a weakening one.
And when she took office as Treasury chief last year, didn’t adopt the “strong dollar policy” championed by predecessor Robert Rubin in the 1990s and reiterated — with varying degrees of support — by many of his successors.
The current Fed chair told lawmakers that the exchange rate was one of three channels through which interest-rate hikes affect the economy. Powell said the other two were asset prices and interest-sensitive spending including on autos.
At the same time, he also sees the impact as limited.
“The dollar has been strong, which would tend to be disinflationary — but only at the very margin,” Powell said at an economic conference in Sintra, Portugal. Private economists agree that the impact on the economy is marginal, at least at a time when inflation is running north of 9%.
The peak effect, seen arriving next year, would still only be about 0.2 percentage point. The Fed’s preferred measure, the personal consumption expenditures price index, is currently running at 6.3%, near the highest since the early 1980s.
Import price growth has moderated in recent months as the dollar has appreciated, but that doesn’t necessarily mean the consumer-price effect is going to be as large, said Gregory Daco, chief economist at Ernst & Young LLP.