Yellen Calls For Fair Trade With China, Urges Other Central Banks To Limit Currency Interventions

In an interview on Monday, Treasury Secretary Janet Yellen outlined the current administration’s stance on several key economic issues, including tariffs on China and the need for domestic investment in strategic sectors, such as semiconductors and clean energy, which she believes are foundational for future job creation and national security.

“The president believes it’s critically important for the United States to have a role in strategic industries,” Yellen told Bloomberg, underscoring the necessity of reducing dependence on China.

She supported President Joe Biden‘s view that China’s “enormous subsidies in critical areas of advanced manufacturing has resulted in overcapacity,” and flagged them as unfair practices.

This concern underpins the U.S. strategy to protect and stimulate domestic industries through legislative actions like the Inflation Reduction Act. These measures aim to bolster sectors that “are creating good manufacturing jobs in parts of the country that have been overlooked or have suffered from deindustrialization in the past.”

During her visit to China, Yellen made it clear that the U.S. “would not allow Chinese overcapacity to harm our emerging industries.” The goal is not to disengage economically from China, but to ensure a fair playing field, according to the treasury secretary.

Fiscal Sustainability and Economic Growth

Yellen echoed Biden’s commitment to economic growth and job creation, highlighting his budget proposals aimed at “helping working families and undertaking investments that are critical to our future.”

The budget also proposes “raising taxes on wealthy individuals who are not paying their fair share and on corporations that are doing extremely well.”

She stressed the necessity of being on “a fiscally sustainable path,” mentioning that the president “has already signed and put into effect a trillion dollars of deficit reduction over the next decade.” An additional “$3 trillion worth of deficit reduction” is proposed in his 2025 budget.

Yellen Addresses Global Currency Practices

Addressing the strength of the dollar and global currency practices, Yellen told Bloomberg that major countries, including those in the G7, “should have exchange rates determined by the market.”

She noted that intervention should be rare and “well communicated, and largely to address excessive fluctuations in currencies.” This approach has been effective, according to Yellen, in maintaining economic stability.

When asked about the Bank of Japan’s interventions to support the yen, Yellen chose not to comment on specific situations but reiterated that “when there is excessive volatility, it’s possible for countries to intervene.”

She cautioned that taking such actions “doesn’t always work without more fundamental changes in policy” and should rarely occur, with clear communication to trade partners, aligning with broader G7 agreements on financial stability practices.

Since the Federal Reserve began its interest rate tightening policy in March 2022, the U.S. dollar has strengthened significantly against global currencies.

The Invesco DB USD Index Bullish Fund ETF UUP, which tracks the performance of the U.S. Dollar index, has surged by 16%. In contrast, the Japanese yen has weakened considerably, with the Invesco CurrencyShares Japanese Yen Trust FXY declining by over 25%.

This decline is mainly due to the Bank of Japan maintaining interest rates at near-record lows, while other major central banks have been increasing their cost of money.

Chart: Tracking the Dollar vs. Yen Performance Since the Start of the Fed’s Interest Rate Hikes

Read now: April Inflation Data Preview: Why Analysts Expect Price Pressures To Cool

Image created using a photo from International Monetary Fund on flickr and Shutterstock.