When devaluation expectations encounter the commitment of a "strong dollar," who will become the "scapegoat," Bostic or Waller?

The desire of U.S. President Donald Trump for interest rate cuts is evident; he hopes to quickly and significantly lower interest rates, and the current trend of currency depreciation seems to align with his wishes. However, this intention creates a stark policy tension with the "strong dollar" commitment upheld by Treasury Secretary Mnuchin and Federal Reserve Chair nominee Waller. Finding a balance between the president's preference for a weak dollar and maintaining the dollar's status as the reserve currency has become a dilemma facing Washington.

According to Bloomberg, Trump recently expressed appreciation for the dollar's decline of about 10% over the past year (with the trade-weighted exchange rate dropping to its lowest point since 2022), stating that this is beneficial for business. However, just a day after Trump's remarks, Treasury Secretary Mnuchin was forced to deny that the U.S. is intervening in exchange rates to suppress the dollar and reiterated the U.S. commitment to a "strong dollar policy." Mnuchin attempted to reconcile the president's comments with policy, emphasizing that exchange rates are not the goal; the key is to attract capital inflows through fundamentals such as lower taxes and smarter regulation.

Waller, who is set to succeed Jerome Powell as Federal Reserve Chair, seems to hold a similar view. Bloomberg columnist Clive Crook analyzed that this policy ambiguity makes it difficult for the market to grasp Washington's true intentions. On one hand, there is the "competitive dollar" aimed at boosting exports through currency depreciation, and on the other hand, there is the "strong dollar" position aimed at maintaining financial hegemony. How to achieve these dual objectives through tariffs, exchange rate interventions, and coordination between the Federal Reserve and the Treasury carries significant execution risks.

Although Mnuchin and Waller currently maintain a subtle ambiguity in their public statements to avoid direct conflict with the White House, there are inherent potential divergences in their priorities. Mnuchin focuses on the orderly issuance of debt and exchange rate stability, while Waller needs to concentrate on controlling inflation. Once the economic fundamentals deteriorate, such as a runaway decline in the dollar or a resurgence of inflation, this apparent consistency will be difficult to maintain, and the White House may need to find a "scapegoat" for the consequences of this policy.

The "Strong Dollar" Paradox in Policy Fog

There is a significant disconnect between Trump's attitude toward interest rates and exchange rates and the public commitments of his senior financial officials. When asked about the dollar's decline since he took office, Trump bluntly stated, "It's great," believing it promotes business activity. However, this position forced Mnuchin to quickly engage in damage control, arguing that targeting specific exchange rates is a "wrong choice," and as long as the U.S. economy is strong, the dollar will naturally be supported through capital inflows.

Waller previously stated during his tenure as a Federal Reserve governor in 2010 that the dollar's status as the world's reserve currency is not an "inherent right" and must be "earned" through a strong economy and deep financial markets. This view implies that policymakers should not directly manipulate prices but should focus on maintaining the dollar's status.

Both Depreciation and Status: A Possible Dual-Track Strategy

How can the U.S. promote dollar depreciation to reduce the trade deficit while also protecting the dollar's financial hegemony? Stephen Miran, a former White House advisor and current temporary Federal Reserve governor, proposed a theoretical framework: **Utilizing all the tools at Washington's disposal ** This includes using punitive tariffs not only to protect domestic producers but also to deter countries planning "de-dollarization"; using foreign exchange interventions to suppress the dollar; and even targeting countries deemed unfair to the U.S. through tax policies (such as the so-called "retaliatory taxes").

Under this strategy, a weaker dollar aids exports, while a strong defense of the dollar's central position retains the "key advantages" referred to by Walsh. However, this requires establishing some new partnership between the Treasury and the Federal Reserve, utilizing public debt management to control the currency.

The New "Agreement" Between the Federal Reserve and the Treasury

According to Bloomberg, Bessenet and Walsh are considering reaching a new Federal Reserve-Treasury "agreement." Although specific details are not yet clear, there seem to be differences in their visions. Walsh tends to favor a reduction in the Federal Reserve's role, similar to the 1951 agreement, aimed at more clearly delineating the boundaries between monetary policy and fiscal policy.

However, Miran's vision is closer to a "merger": If Treasury interventions lead to a depreciation of the dollar, prompting foreigners to sell U.S. Treasuries, the Federal Reserve will intervene to purchase bonds to limit the rise in long-term interest rates (yield curve control). Theoretically, the Federal Reserve would still maintain "independence" in setting short-term rates, but its balance sheet would serve the Treasury's goals of managing exchange rates and yields. The market is concerned that this coordination could be seen as the Federal Reserve deviating from its core mission of combating inflation.

Ambiguous Consensus and Potential Scapegoats

Faced with the unpredictable statements that the White House may issue at any time regarding the dollar, interest rates, tariffs, and other issues via social media, Bessenet and Walsh's best current strategy is to maintain ambiguity in their statements. This "economic policy obfuscation" has become a professional necessity.

However, the ultimate goals of the two are not entirely aligned. Bessenet, as Treasury Secretary, seeks moderate 10-year Treasury yields and stable currency; Walsh, as central bank governor, must defend the independence of the central bank and control inflation. If the economic situation reverses—if the dollar continues to decline intentionally or unintentionally, leading to soaring yields, a stock market pullback, and a rebound in inflation—these two officials' priorities will inevitably conflict.

At that time, the White House will need someone to take responsibility for failed economic policies, and amidst the chaos of a depreciating dollar and shaken status, one or even both of Bessenet or Walsh may find it difficult to escape the fate of becoming the "scapegoat."