Economist talks dollar dominance and strength

We are just moments away from the confirmation hearing for President-elect Donald Trump's pick for Treasury Secretary Scott Bessen. Now in excerpts from his opening remarks, Bessen is expected to say that he sees the Trump administration kicking off a new economic golden age. He also had some commentary in there about the strong U.S. dollar, saying, quote, we must ensure that the U.S. dollar remains the world's reserve currency. Joining us now, we want to bring in Nathan Sheets. He's a chief global economist at Citi and former undersecretary of the Treasury for International Affairs during the Obama administration. Nathan, it's great to have you here with us this morning. Let's talk about what we could hear from Bessen and the economic implications. And starting right there with the strong dollar, there is some debate about actually how big of a priority that still will be for Bessen at this point. What are you expecting? Well, I think the reality is that we are in an environment that has been very supportive for the dollar in recent years. And I think that reflects, one, that the U.S. economy has been relatively strong, certainly compared to many other developed market economies. And as a result of that, the Fed has been relatively aggressive. And when you look at where rates are likely to go in the year ahead, it's much easier to pencil in significant rate cuts for many foreign economies than it is for the United States. And when I put all that together, I'd say, we've got a cyclically strong dollar. And there may also be some structural factors supporting the dollar as well. So it's been strong. And for the time ahead, I'd expect it to remain strong. Also, it's interesting, and Shana, you had pointed this out, too, right before we started here, that he doesn't necessarily talk about the need for a strong dollar. He talks about the need for the dollar as the world's reserve currency. And one potential headwind to that, from my view, has been this obsession with crypto policy and a Bitcoin strategic reserve. Do you think that those two policies are at odds with one another? Yeah, this is a great distinction, that I think a strong dollar facilitates the dollar's role as a reserve currency. It makes it more attractive for foreign investors and others to hold around the world. But being the reserve currency is broader than that. And I think it reflects familiarity with U.S. markets, with the currency, with U.S. assets. It reflects confidence in U.S. institutions. It reflects constituency. And we are the incumbents here. And that's a powerful attraction to the dollar as well. So putting all that together, these structural factors remain very much in play. I don't think a Bitcoin reserve, one way or another, is going to be an important determinant as to whether the dollar is a reserve currency. I don't quite understand how a Bitcoin reserve would work, but I'll leave that to others to comment on. Nathan, let's talk a little bit about tariffs when we talk about dollar implications, the strong dollar implications, how that factors into some of the tariff plans that we're hearing from the Trump administration. I'm curious, I guess first, let's just focus on the U.S. economic impact. What is in your base case there, just in terms of how big of a risk this could be in terms of reigniting some of those inflationary pressures? Well, the key thought here is that it depends critically on how vigorous those tariffs are going to be. If they're larger tariffs, then these effects would be much larger and potentially more disruptive. But qualitatively, what we can say is, as the Trump administration imposes tariffs on U.S. imports, it's going to tend to raise the price of imports in the United States. And that's going to pass through into higher consumer prices and for a period, higher measured inflation. So I think the reality of tariffs is that prices are going to be somewhat higher and inflation is likely to be higher. By the same token, it's a tax on consumers and consumers will not have the same purchasing power that they would have had in the absence of those tariffs. So when I do the math on this, it feels to me like as we impose tariffs, it means a little more pressure on prices, a little less activity and spending in the economy. It's what economists would call an adverse supply shock. But then the magnitude, is that a big effect or is that a small effect, really depends on what those tariffs look like. And then how that impacts the Fed as well. If we do see more inflation from the price hikes that could happen off the back of those tariffs, which makes me think about Besson's 3-3-3 plan and his goal of cutting the deficit to GDP ratio by 3%. Again, how at odds is that goal with inflationary policies coming from tariffs? Yeah. So your question about how the Fed reacts to this is a key one, because what is the Fed hoping to achieve? Well, the Fed wants price stability and full employment. And what's happening here is you're seeing more inflation, but also potentially weaker growth. And the Fed has to choose between its key objectives. Typically what central banks do in the face of those kinds of shocks is just watch and wait and see which of the two effects ends up being more powerful. On Scott Besson's 3-3-3 plan, what I would say is it's laudable. I think it's aspirational. And to the extent that he or President Trump has a formula, particularly to get us to 3% economic growth and a 3% budget deficit, I, of all people, would be quick to welcome that. I just don't see how we get there. I get lost in the logistics of how it's achievable.