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Op-Ed: High Interest Rates Are Hobbling Growth

The Fed strengthened the dollar when U.S. growth and global stagnation were already boosting its value.

This article originally appeared on the Wall Street Journal on May 29, 2019.

There’s an increasingly strong case that the Federal Reserve should cut interest rates to weaken the U.S. dollar and encourage greater exports—and that it should do it soon.

A strong dollar makes it cheaper for Americans to purchase foreign goods and more expensive for those using a foreign currency to purchase American goods. The dollar has strengthened relative to foreign currencies since the second quarter of 2018, and U.S. exports have essentially stagnated. While the U.S. economy surged in 2018 thanks to tax cuts, deregulation and a declining oil price, gross domestic product could have grown faster. Preliminary GDP growth over the past three quarters has been a strong 2.9%, but had real exports grown at a 3% annualized rate—which they did from 2009 to 2018—GDP would have grown by 3.2%.

The Fed’s tightening of the money supply contributed to this decline in export growth by making the U.S. dollar more valuable. The Fed has increased the federal-funds rate nine times since beginning the rate increases at the end of 2015, which boosted the demand for greenbacks. The greater the federal-funds rate, the greater the return on investments made in dollars. The Fed also ended its expansive monetary policy as the economy improved, constraining the money supply and further enhancing the dollar’s value.

The Fed’s policies had an even greater effect on exports because U.S. economic growth was already strengthening the dollar. As U.S. growth accelerated, the rest of the world fell into a serious slowdown. Growth rates have been slipping in most other Organization for Economic Cooperation and Development countries since 2018, and some experts believe China is on the brink of an era-defining downturn. This global stagnation further bolstered demand for the U.S. dollar. Foreigners tend to view the dollar as a safe haven during times of global economic uncertainty.

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