Former Fed Chair Janet Yellen: Far from retired, nowhere near done

The Fed is very close to having satisfied its maximum employment and price stability mandates and you can see that most people feel good about the economy and the Fed.

But it would concern me — President Trump’s comments about Chair Powell and about the Fed do concern me, because if that becomes concerted, I think it does have the impact, especially if conditions in the U.S. for any reason were to deteriorate, it could undermine confidence in the Fed. And I think that that would be a bad thing.

Ryssdal: Do you think the president has a grasp of macroeconomic policy?

Yellen: No, I do not.

Ryssdal: Tell me more.

Yellen: Well, I doubt that he would even be able to say that the Fed’s goals are maximum employment and price stability, which is the goals that Congress have assigned to the Fed. He’s made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the U.S. balance of trade. And, you know, I think comments like that shows a lack of understanding of the impact of the Fed on the economy, and appropriate policy goals.

Why Trump Might Win With China

Beijing may be ready to deal as it eyes slowing growth, a weakening yuan and other challenges.

Despite such interventions, it will be hard for the government to resist yuan depreciation. The weakening reflects a long-term growth slowdown—the natural diminishing returns of economic development.

..  a combination of slower growth, debt defaults and inflation will continue to weaken the yuan and reduce capital inflows. Foreign reserves, which grew for decades, have declined since 2014. The Chinese elite are cognizant of these problems, hence their increasingly desperate attempts to smuggle wealth out of the country.

.. Mr. Trump has been dealt a stronger hand than he could have asked for on trade with China, which has more incentive to negotiate than ever. He should walk away with a better deal from Beijing than any of his predecessors were able to extract. Mr. Trump may even be able to make progress on geopolitical issues, such as limiting China’s military adventures in international waters and securing its help on North Korea.

China’s Gamble: How a Crusade to Prop Up the Yuan Imperils Other Pressing Mandates

Beijing’s aggressive approach threatens to shortchange the tasks of safeguarding economic growth

 .. the bank’s emphasis on propping up the yuan has constrained its ability to fight other economic ills such as persistent housing bubbles. “The issue of the exchange rate,” he says, “has become shackles on policy makers’ ability to take other necessary actions.”

.. China’s currency-first policy is risky because the country now faces what economists call the “trilemma,” the theory that a country can’t at once have a controlled exchange rate, free capital flow and independent monetary policy.

.. it is also creating unintended stresses, including heightened risks of a full-blown cash squeeze

.. Since then, the PBOC has spent $1 trillion, a quarter of its currency reserves, to control the yuan’s fall.

.. China isn’t seeking to stop the yuan’s fall altogether, but to guide it lower in an orderly fashion. Too sharp a drop could drive up inflation by increasing import costs and cause uncontrollable capital flight—battering confidence in the Communist Party.

.. A weaker yuan also makes it harder for Chinese companies, from state banks to airlines, to service their more-than-$1 trillion foreign debt.

.. The PBOC is also refraining from using traditional monetary-policy tools such as one it usually employed when the economy needed a push: cutting the amounts banks are required to hold in reserve, so they can make more loans. China now has one of the highest reserve-requirement ratios in the world

.. “China should tighten as little as possible so that it won’t become too expensive for Chinese firms to borrow money, but it needs to tighten enough to keep money at home,”

.. “The strategy is ultimately about buying time, but it’s a bridge to nowhere unless the authorities successfully deal with the debt problem and undertake reforms that allow for healthier growth.”

.. China’s financial system faces a liquidity shortfall—the gap between how much money is needed to meet China’s 6.5% growth target and how much is available—of as much as 13.1 trillion yuan this year.

.. the Federal Reserve Bank of St. Louis called China’s $1 trillion reserve decline “unprecedented” and said China must eventually choose some combination of tighter capital controls, tighter monetary policy or a devaluation to avoid further depletion.

Economists and investors warn that because of the effect of higher interest rates on companies with massive debt, Beijing may eventually have to give up currency control and let interest rates fall.

“The greatest risk in 2017,” says Pimco’s Mr. Frieda, “is that China is forced to choose in favor of financial-system stability at the expense of exchange-rate stability.”

The Donald Trump Trade Effect: Watch the Peso, Not Ford

Mexico’s central bank raised short-term interest rateshalf a percentage point in response to the peso’s 11% plunge since Mr. Trump was elected. The Bank of Mexico is worried that the depreciation will push up inflation, and by raising rates it will restrain spending and contain those price pressures.

.. This, of course, is the opposite of what Mr. Trump intends. On the campaign trail, he cited the elevated U.S. trade deficit as proof of how foreigners were cheating the U.S. through badly negotiated deals like the North American Free Trade Agreement.

.. But as I noted in a column a month ago, Mr. Trump’s fiscal and trade policies are in conflict. His plans to slash taxes and boost infrastructure spending will inflate the budget deficit and stimulate an economy already close to full employment. To prevent an outbreak of inflation, the Federal Reserve will raise interest rates more quickly, pushing the dollar higher. The combination of a stronger dollar and stronger domestic demand will curb exports and suck in imports, causing the trade deficit to widen.

.. Ford’s decision to keep SUV production in Kentucky instead of Mexico at the margin will reduce imports from Mexico. But that will likely matter less than if less Mexican consumption and a strong dollar hit U.S. exports. Those are the unintended consequences of Mr. Trump.