The Fed Needs to Tread Carefully With This Strange Dollar

The US economy hasn’t seen tariffs like these in around 80 years. Given the lack of recent precedent, the Federal Reserve is right to wait on more evidence that consumer prices aren’t spiking before proceeding with interest rate cuts. There’s another reason to tread carefully in these uncertain times: The extremely unusual behavior of the US dollar.

Many economists — including Council of Economic Advisors Chair Stephen Miran — expected the buck to strengthen when President Donald Trump implemented tariffs. In an essay published last November, Miran wrote that the exchange rate was “more likely than not” to appreciate alongside an improving trade balance, as it did during Trump’s first trade war in 2018 and 2019. The so-called currency offset was critical to his view that the new duties wouldn’t necessarily be passed through to consumers, at least not entirely. Treasury Secretary Scott Bessent made the same point during his confirmation hearings.