If Donald Trump is indeed backing off and allowing the Federal Reserve to do what it needs to do, then the U.S. president may have to park his administration’s long-assumed preference for a weaker dollar too. For some nervous Republicans, that may come asa relief.
As his appointee Kevin Warsh was sworn in as Fed chair last week, Trump appeared to change tack on his perpetual demand for ever-lower U.S. interest rates, and his persistent barracking of Warsh’s predecessor, Jerome Powell, on the issue.
In a series of interviews through the week and again at the swearing-in ceremony on Friday, Trump said Warsh would have the room to act as needed and to act independently to fight inflation, provided he did not confuse growth with inflation.
“Don’t look at me, don’t look at anybody, just do your own thing,” Trump said.
He almost reverted to type later in the day, restating a preference for lower rates once energy prices subsided. But the signal had been made by then.
To anyone watching closely over the past year, last week marked a distinct shift in tone. It at least gave Warsh some space to tackle cost-of-living pressures that are weighing on Trump’s approval ratings. It also implicitly acknowledged that his new Fed chief has little or no cover to argue for rate cuts with inflation running near 4%.
That’s significant for investors because of the growing disconnect between forecasters and markets.
Fed futures markets have wiped out all bets on 2026 rate cuts since mid-March, and 2-year yields have been above the policy rate consistently since then too. Futures are actually priced for the next move being a hike within 12 months.
Yet some 50% of global fund managers polled by Bank of America as recently as mid-May still expected at least one Fed cut by year-end.
Energy market damage, a worsening inflation picture and signals from Fed policymakers largely explain the market pricing. Yet investors’ stubborn rate-cut expectations suggest a lingering belief that Warsh would eventually do his master’s bidding this year.
But if the president has stepped back from demanding immediate cuts, that assumption may need revisiting.
How long that restraint lasts is an open question.
Much hinges on the trajectory of the Iran war. But many central bankers, including some at the European Central Bank, argue that monetary tightening is necessary now regardless of a peace deal, in order to signal a commitment to inflation targets.
What’s more, the sheer heat of the AI boom is creating chip and energy supply bottlenecks that may sustain higher inflation well beyond the crude oil hiatus anyway. It may be years before any productivity gains reshape the debate.
As former Fed Governor Roger Ferguson wrote for the Council on Foreign Relations this week: “After five consecutive years of inflation above the Fed’s 2% target, with cumulative price increases approaching 25%, many Americans continue to feel the strain of an affordability crisis.”
TRUMP FED PIVOT QUESTIONS DOLLAR VIEW
Trump’s slightly grudging acknowledgment that rates probably shouldn’t come down at this juncture may also upend another presumed macroeconomic priority of the administration: reversing dollar strength to help re-industrialise America.
Both Trump and his Treasury Secretary Scott Bessent have been relatively guarded in their pronouncements on the dollar; a weaker greenback has been widely assumed to be a central plank of their trade and economic reset, and is backed by many White House advisers.
Giving free rein to Warsh at the Fed could have implications for the dollar beyond just interest rates.
Warsh’s preference for shrinking the Fed’s $6.7 trillion balance sheet could drain dollars from the system over time. His doubts about the Fed’s overseas dollar swap lines also raise questions about its role as lender of last resort in dollars for the rest of the world.
While some wonder about the implications of that for global dollar usage over the years ahead, the exchange-rate fallout from those moves alone could well be a stronger dollar.
Some economists think Trump should in any case pivot away from any weak-dollar orientation, as that only worsens cost-of-living pressures on workers and damages the government’s already stretched overseas funding of its vast debts.
In an opinion piece for the Project Syndicate site, Glenn Hubbard – former chair of the Council of Economic Advisers under President George W. Bush – called the use of the dollar to reinvigorate U.S. industry or lift left-behind workers “the wrong instrument”.
Hubbard noted the U.S. had large trade imbalances when the dollar was weak as well, and that tariffs exaggerate manufacturing input costs, given that half of U.S. imports are intermediate goods.
“As November’s midterm elections approach, U.S. President Donald Trump must stop pushing for a weaker dollar, which will exacerbate the affordability pressures many Americans face and harm the country’s fiscal position,” he wrote, adding that more research funding for industry, streamlined regulation and worker retraining are better policies to achieve his aims.
If Trump gives his new Fed chief more than a fleeting window to be hawkish and tamp down inflation, he may be implicitly abandoning a weak-dollar policy in the same stroke. The implications for financial markets could be considerable over the months and years ahead.
(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.)
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(by Mike Dolan; Editing by Marguerita Choy)