US must be ‘careful’ in demanding stable Chinese yuan to end trade war, says former US central bank head

Former US Federal Reserve chair Janet Yellen – refuting the Trump administration’s allegations that China is a currency manipulator – wants American trade negotiators to think twice about asking China to maintain a stable exchange rate between the yuan and the US dollar, as it is “difficult and treacherous” to define when a country is manipulating its currency.

Central banks need to be able to use all policy levers, including the exchange rate, to meet domestic economic needs, Yellen told a Brookings Institution podcast, warning the US trade negotiation team “not to define policy tools as currency manipulation”.

The US has insisted that China keep the yuan exchange rate stable as a condition for ending the trade war, to prevent it from using devaluation to offset the effects of American trade tariffs, Bloomberg reported this week.

That call was in harmony with Washington’s long-time insistence that China adopt a market-oriented exchange rate system so that the yuan can find its “fair value” against the US dollar.

The US and the other industrial nations that make up the G7 have for years defined currency manipulation as directly intervening in the foreign exchange market to alter a currency’s value to improve a country’s international competitive position and trade flows.

But Yellen said countries should be allowed to use key macroeconomic policy levers, including the exchange rate, to achieve domestic policy goals regarding price stability and full employment.

“Monetary policy does have a systematic effect on a country’s exchange rate but, nevertheless, I think that it’s widely agreed that it should be available to be used for domestic purposes,” the former Fed chief said.

“So we would want to be careful not to define domestic policy tools as currency manipulation.”