For decades, the freedom of monetary policymakers to make difficult decisions without having to worry about political blowback has proven indispensable to macroeconomic stability. But now, central bankers must ease monetary policies in response to populist mistakes for which they themselves will be blamed.CHICAGO – Central-bank independence is back in the news. In the United States, President Donald Trump has been berating the Federal Reserve for keeping interest rates too high, and has reportedly explored the possibility of forcing out Fed Chair Jerome Powell. In Turkey, President Recep Tayyip Erdoğan has fired the central-bank governor. The new governor is now pursuing sharp rate cuts. And these are hardly the only examples of populist governments setting their sights on central banks in recent months.
In theory, central-bank independence means that monetary policymakers have the freedom to make unpopular but necessary decisions, particularly when it comes to combating inflation and financial excesses, because they do not have to stand for election. When faced with such decisions, elected officials will always be tempted to adopt a softer response, regardless of the longer-term costs. To avoid this, they have handed over the task of intervening directly in monetary and financial matters to central bankers, who have the discretion to meet goals set by the political establishment however they choose.
This arrangement gives investors more confidence in a country’s monetary and financial stability, and they will reward it (and its political establishment) by accepting lower interest rates for its debt. In theory, the country thus will live happily ever after, with low inflation and financial-sector stability.
Having proved effective in many countries starting in the 1980s, central-bank independence became a mantra for policymakers in the 1990s. Central bankers were held in high esteem, and their utterances, though often elliptical or even incomprehensible, were treated with deep reverence. Fearing a recurrence of the high inflation of the early 1980s, politicians gave monetary policymakers wide leeway, and scarcely ever talked about their actions publicly.
But now, three developments seem to have shattered this entente in developed countries. The first development was the 2008 global financial crisis, which suggested that central banks had been asleep at the wheel. Although central bankers managed to create an even more powerful aura around themselves by marshaling a forceful response to the crisis, politicians have since come to resent sharing the stage with these unelected saviors.
Second, since the crisis, central banks have repeatedly fallen short of their inflation targets. While this may suggest that they could have done more to boost growth, in reality they don’t have the means to pursue much additional monetary easing, even using unconventional tools. Any hint of further easing seems to encourage financial risk-taking more than real investment. Central bankers have thus become hostages of the aura they helped to conjure. When the public believes that monetary policymakers have superpowers, politicians will ask why those powers aren’t being used to fulfill their mandates.
Third, in recent years many central banks changed their communication approach, shifting from Delphic utterances to a policy of full transparency. But since the crisis, many of their public forecasts of growth and inflation have missed the mark. That these might have been the best estimates at the time convinces no one. That they were wrong is all that matters. This has left them triply damned in the eyes of politicians: they
- failed to prevent the financial crisis and paid no price; they are
- failing now to meet their mandate; and they
- seem to know no more than the rest of us about the economy.
It is no surprise that populist leaders would be among the most incensed at central banks. Populists believe they have a mandate from “the people” to wrest control of institutions from the “elites,” and there is nothing more elite than pointy-headed PhD economists speaking in jargon and meeting periodically behind closed doors in places like Basel, Switzerland. For a populist leader who fears that a recession might derail his agenda and tarnish his own image of infallibility, the central bank is the perfect scapegoat.
Markets seem curiously benign in the face of these attacks. In the past, they would have reacted by pushing up interest rates. But investors seem to have concluded that the deflationary consequences of the policy uncertainty created by the unorthodox and unpredictable actions of populist administrations far outweigh any damage done to central bank independence. So they want central banks to respond as the populist leader desires, not to support their “awesome” policies, but to offset their adverse consequences.
A central bank’s mandate requires it to ease monetary policy when growth is flagging, even when the government’s own policies are the problem. Though the central bank is still autonomous, it effectively becomes a dependent follower. In such cases, it may even encourage the government to undertake riskier policies on the assumption that the central bank will bail out the economy as needed. Worse, populist leaders may mistakenly believe the central bank can do more to rescue the economy from their policy mistakes than it actually can deliver. Such misunderstandings could be deeply problematic for the economy.
Furthermore, central bankers are not immune to public attack. They know that an adverse image hurts central bank credibility as well as its ability to recruit and act in the future. Knowing that they are being set up to take the fall in case the economy falters, it would be only human for central bankers to buy extra insurance against that eventuality. In the past, the cost would have been higher inflation over the medium term; today, it is more likely that the cost will be more future financial instability. This possibility, of course, will tend to depress market interest rates further rather than elevating them.
What can central bankers do? Above all, they need to explain their role to the public and why it is about more than simply moving interest rates up or down on a whim. Powell has been transparent in his press conferences and speeches, as well as honest about central bankers’ own uncertainties regarding the economy. Shattering the mystique surrounding central banking could open it to attack in the short run, but will pay off in the long run. The sooner the public understands that central bankers are ordinary people doing a difficult job with limited tools under trying circumstances, the less it will expect monetary policy magically to correct elected politicians’ errors. Under current conditions, that may be the best form of independence central bankers can hope for.
President Trump, do yourself a favor. Stop attacking the Federal Reserve and its chairman, Jerome H. Powell (yes, the same Powell you nominated). The result would be better for you, better for Powell and — most important — better for the country.
Unfortunately, Trump can’t seem to restrain himself.
“I will tell you, at this moment in time I am not at all happy with the Fed. . . . They’re making a mistake because . . . my gut tells me more sometimes than anyone else’s brain can ever tell me. . . . I’m not even a little bit happy with my selection of Jay. Not even a little bit.”
.. Until recently, there seemed to be a crude consensus among economists that the Fed should continue its gradual increases in interest rates to preempt higher inflation. The economy seems strong enough to tolerate tighter credit.
But the consensus may be fraying. There are signs of weakness.
- The stock market has fallen;
- housing sales and prices have softened;
- the trade war between the United States and China remains unresolved
.. On Nov. 26, the paper ran an op-ed by
- Harvard economist Martin Feldstein, a chairman of the Council of Economic Advisers under President Ronald Reagan, urging the Fed to raise rates. The next day, the Journal ran an op-ed by
- Harvard economist Jason Furman, chairman of the CEA under President Barack Obama, counseling delay.
.. One danger for Trump is that the Fed, seeking to prove its “independence,” will deliberately oppose what the president prefers.
.. One danger for Trump is that the Fed, seeking to prove its “independence,” will deliberately oppose what the president prefers.
.. “President Trump has gone completely off the rails with his criticism of Fed Chair Powell,” says economist Mark Zandi of Moody’s Analytics. He “is using the Fed as a scapegoat for anything that goes wrong in the stock market and the economy.”
In Trump’s defense, he is not the first president to try to control the Fed and corrupt its independence.
- Lyndon B. Johnson lambasted then-Fed Chairman William McChesney Martin in the mid-1960s for raising interest rates against his wishes.
- Richard M. Nixon pressured Arthur F. Burns, Martin’s successor, to keep rates low. Likewise, President
- Harry S. Truman pushed the Fed to maintain easy money and credit.
.. But these and other cases occurred mainly behind closed doors. Trump’s brash innovation has been to take his complaints public; the apparent aim is to intimidate the Fed into doing his bidding. If the Fed resists, Trump might propose legislation curbing its powers. That would signal a real state of war between Trump and the Fed, with what consequences for financial markets and the economy, it’s hard to know.
.. It’s also true that attacking the Fed has long been standard operating procedure for members of Congress of both parties.
“Congress depends on the Fed both to steer the economy and absorb public blame when the economy falters,” write Binder and Spindel. A lot of this criticism is political theater, designed to impress voters but not to do much else. What’s not familiar is for the president to be leading the charge.
Mr. Trump seems to have concluded what many other conservatives did about the tragedy in Charlottesville, Va.: As tragic as it was, it was incited by a small, unrepresentative group of bigots purporting to speak for the right whose antics would be exhaustively covered in the news.
.. “They think there were 300 or so racists who showed up to a rally, and who got exactly what they wanted: Violence, and violence in a way that inspires the nation’s elite to double down on iconoclasm in a way they hope grows their movement,” said Ben Domenech, the publisher of The Federalist, an online magazine.
.. Mr. Trump and conservatives have pointed to several recent episodes as evidence of the left gone mad.
- They include the comedian Kathy Griffin’s posing for a picture with a fake severed Trump head, and
- a production of Shakespeare’s “Julius Caesar” that featured a Trump-like actor as the emperor who is fatally stabbed onstage.
- Some seized on the shooting that seriously injured Representative Steve Scalise
- One recent web video from the National Rifle Association accused liberals of attempting to “bully and terrorize the law abiding” as it implored Americans to “fight this violence of lies with the clenched fist of truth.”
.. Of at least 372 murders that were committed by domestic extremists between 2007 and 2016, according to a study by the Anti-Defamation League,
- 74 percent were committed by right-wing extremists.
- Muslim extremists were responsible for 24 percent of those killings,
- and the small remainder were committed by left-wing extremists
.. the emphasis for many conservatives is not on statistics that indicate who is the more violent offender. Rather, he said, the point is about the general tenor of political debate, which people like him believe is weighted against them.
.. “You don’t have a ton of reporters banging on the doors of Democrats asking them to denounce Antifa,” he said, referring to the militant Marxist-inspired group that rioted at Mr. Trump’s inauguration and often shows up looking for confrontation at sites where conservative writers like Ann Coulter and Milo Yiannopoulos are scheduled to speak.
.. Mr. Trump is no mere bit player in the discussion of political violence. At various times, he has offered to pay the legal bills of supporters who get in brawls at his events and stated, without offering any proof, that paid agitators were responsible for protests against him.
.. Alex Jones .. said people who protested the white supremacists over the weekend were probably actors
.. Mr. Jones played down the significance of the violence, saying it was likely staged by “Democratic Party activists” who are looking to “overdemonize” whites and “put chips on the shoulders of the so-called minorities.”
.. Demographically, blacks are 12 times more likely to attack whites for no reason,” Mr. Jones went on, providing no evidence for his claim. “It’s a fact.”
.. He then recounted his own experience watching a Nazi rally he said was attended by Jews posing as Nazis, evident by their “curly hair, and you know, dark eyes.”
.. Mike Cernovich, a conspiracy theory peddler, was gleeful as he posted on Twitter about the violence on Saturday. “Civil War is here!” he wrote.
.. There is also a new political term to describe the circular firing squad in which right and left have blamed the other for the country’s degenerating political debate — “whataboutism.”
.. Guy Benson, a conservative writer and an author of the book “End of Discussion,” which argues that the left has tried to shut down political debate by declaring certain topics off the table, said he sees a “whataboutism overreach” among some conservatives.
.. “Round and round we go with this one-upsmanship of who’s worse,” Mr. Benson added, “and that’s a really terrible way to argue.”
Lawrence O’Donnell explains why Jared Kushner could be in serious legal trouble for not disclosing the Russian lawyer meeting on his security clearance form and why Trump’s lawyers are right for trying to build a wall between the President and his son-in-law.
The New York Times story was based on White House sources.
Jared Kushner’s lawyers found the email and did their best to manage the legal fallout.
Who would do that to their brother in law? Jared Kushner’s father engaged in witness-tampering. Jared Kushner’s father sent video of prostitution entrapment to his sister.
Jared Kushner gave Trump the worst possible advice on Russia — to fire James Comey.