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Meet the new boss, definitely not the same as the old boss. But will we get fooled again?

With apologies to the Who’s Pete Townshend, Donald Trump served notice that change is coming to the White House at his inauguration Friday. And it can be summed up in two words: America first.

Every decision on trade, taxes, immigration, and foreign affairs will be made to benefit the U.S. and to protect the nation from “the ravages” of foreign competition, the new president vowed in his inaugural address. “Protection will lead to great prosperity and strength,” he added.

Maybe “protection” isn’t the same as “protectionism,” but the differences seem hard to discern in this case.

“We will follow two simple rules: Buy American and hire American,” the new president emphasized.

Already during the interregnum between Election Day and Inauguration Day, Trump cajoled auto companies to move or keep production stateside (while also criticizing pharmaceutical makers and defense contractors for charging what he deems too much). Until Friday, he had only the bully pulpit as a means to put America first. Now, after being sworn in as the 45th president, he actually has the power to further that aim.

Simpler and quicker than tariffs or tax changes would be to alter the terms of trade via the currency market. The dollar is “too strong,” Trump flatly told The Wall Street Journal in an interview. While it marks an about-face from the “strong dollar” mantra chanted by U.S. administrations for more than two decades, since Bill Clinton’s Treasury Secretary Robert Rubin, it fits with Trump’s America-first credo.

It recalls a similar stance famously espoused by John Connally, Richard Nixon’s Treasury secretary, who in 1971 declared to the rest of the world that the dollar was “our currency, but your problem.” Nor have calls to lower the greenback been unique. During the Jimmy Carter administration, Treasury Secretary W. Michael Blumenthal similarly called for a cheaper buck to boost U.S. competitiveness and narrow the trade deficit.

Swings in the dollar—both sharply higher, as in the 1990s and during the past two years, and sharply lower, as occurred in the years following the financial crisis—are hugely disruptive to the rest of the world.

Probably more so than for the U.S. economy, which is relatively closed, compared with those of other nations that are vitally dependent on foreign trade.

In 1967, the United Kingdom’s prime minister, Harold Wilson, tried to convince Brits, when sterling was devalued, that the pound notes in their pockets were still worth the same—even though they purchased only $2.40, rather than the previous $2.80. For most U.S. consumers, whether the euro fetches $1.10 or $1.20 doesn’t matter much; maybe if they go on vacation abroad, but not on their weekly trek to the supermarket.

But for U.S. businesses, from a major multinational corporation to a small importer of fine leather goods, the dollar’s exchange rate is no small matter. And it’s an easy target for Trump to talk (or tweet) down. That’s quite unlike the matter of border taxation schemes, which he called “too complicated.”

Trump once again insisted that the dollar’s overvaluation was largely a result of China’s deliberate undervaluation of its currency, the yuan. When the Journal pointed out that China’s monetary authorities actually have been acting to boost the yuan, Trump responded that they were just trying to avoid angering the U.S. Whatever the motivation, Chinese authorities have clamped down on capital flight, after having spent approximately $1 trillion in foreign-exchange reserves to slow the yuan’s decline—the opposite of manipulating its currency to gain a trade advantage.

To be sure, Steven Mnuchin, Trump’s choice for Treasury secretary, walked back his likely future boss’ implicit call for a cheaper dollar during his Senate confirmation hearing last week. That wasn’t the only time Trump’s cabinet choices voiced views consistent with more generally accepted opinions (although not necessarily congruent with those of the new president), extending to matters ranging from Russia to global warming.

But to make America first, Trump’s initial plan is to debase the dollar. That would induce everyone to “buy American and hire American.” As Greg Valliere, chief strategist of Horizon Investments, notes, the inaugural address was conspicuously lacking mentions of tax cuts or tax reform. Those were the main things the financial markets wanted to hear, and what they have rallied on since the election.

But it seems that actions on the tax front won’t be coming until later this year. And that would be “later than the markets would prefer,” he adds, even if their expectations were unrealistically optimistic.

TRUMP’S DESIRE FOR A WEAKER DOLLAR clashes with GOP plans for fiscal stimulus through tax cuts and infrastructure spending. Those actions would lead to higher growth in gross domestic product and inflation, both of which tend to push the buck higher, not lower.
 
That would increase the odds that the Federal Reserve would move forward with interest-rate increases. Based on the policy-setting Federal Open Market Committee’s dot-plot graph of members’ expectations for the federal-funds target range released last month, they look for three quarter-point hikes by the end of 2017.

For its part, the fed-funds futures market is pricing in just two quarter-point increases from the current 0.5%-to-0.75% target range, according to a Bloomberg analysis. The first is expected by June. Fed Chair Janet Yellen last week essentially reiterated the FOMC’s view, saying it would be “prudent to adjust the stance of monetary policy gradually over time.”

Trump’s statement favoring a softer dollar initially pushed rates lower, since that implied a slower pace of Fed tightening. But after Yellen’s comments, they reverted, with the benchmark Treasury 10-year note hovering just under 2.5%.

While the markets’ attention is centered on the new administration, it would be a mistake to ignore the Fed.

“If you merely watched Reagan in his early months and not the Fed, you would have been caught in a 25% bear market that didn’t end until the fall of 1982,” David Rosenberg, chief economist and strategist at Gluskin Sheff, points out.

“As with Reagan, the good stuff may end up awaiting the second half of his first term,” he adds. “Anyone who has been in the markets long enough knows how important Fed liquidity is—it is the prime reason why the S&P 500 tripled under Obama’s tenure.

“It is not Trump’s policies that will influence the contours of the business cycle or market performance looking ahead, but the Fed’s reaction function,” Rosenberg continues. In other words, how will Yellen & Co. react to incoming data and the impact of policy moves on growth and inflation?

But more than the numbers, the Fed cannot help but feel the influence of the new administration. Last May, candidate Trump said he would most likely replace Yellen if he were elected, because she isn’t a Republican.

By September, in a debate with Hillary Clinton, he charged that the Fed chair was “doing political things” by keeping rates low. “When they raise interest rates, you’re going to see some bad things happen because they’re not doing their job,” he added.

That’s because, he claimed, the economy was in a “big, fat bubble.” He warned of a stock market slide when the Fed tightened. Whether he still believes that is uncertain. But further rate hikes, all else being equal, would tend to lift the greenback.

While Yellen’s term ends in January 2018, there are currently two vacancies on the Fed’s Board of Governors, which is supposed to consist of seven members, including her and Vice Chairman Stanley Fischer, whose term ends in June 2018. So, the White House could exert a lot of influence on Fed policy with personnel decisions in the next year or so.

But in what way? Many Trump supporters fault the Fed for holding interest rates too low for too long. On the other hand, higher rates could blunt the impact of future tax cuts and infrastructure spending, while boosting the dollar.

While rates remain historically low, some critics contend that the Fed may have tightened policy too much already.

Paul Kasriel, the former chief economist at Northern Trust who currently pens his Econtrarian blog as senior economic and investment advisor at Legacy Private Trust in Neenah, Wis., notes that the Fed has tightened since it ended its quantitative-easing program in 2015, with an outright contraction of the monetary base (reserves and currency) last year. Banks also slowed credit expansion markedly throughout 2016.

What Kasriel dubs “thin air” credit—the sum of what the Fed and commercial banks together can conjure up—correlates closely with the economy, with a lagged effect one quarter later. (Specifically, he’s watching gross domestic purchases, which is GDP minus exports, plus imports. In other words, what domestic purchasers buy, regardless of origin.)

What “could stimulate thin-air credit growth would be a sharp increase in federal credit demand, resulting from tax cuts and/or discretionary spending increases,” he continues, which is what the stock market is anticipating. All else being equal, that would mean higher interest rates. “It is not a question if significant federal tax cuts are coming in the next two years, but when and how the Fed will react to them,” Kasriel concludes.

If the reaction is to lift the fed-funds rate, that not only could blunt any stimulus from the fiscal side, but also lift the dollar further. The outcome may not be what stock market bulls hope as the Dow Jones Industrial Average remains frustratingly short of the 20,000 mark.