Federal Reserve chair Jerome Powell has been branded an "enemy" by President Donald Trump. Photo / Getty Images
Federal Reserve chair Jerome Powell has been branded an "enemy" by President Donald Trump. Photo / Getty Images
EDITORIAL:
Central bankers are under fire. Donald Trump has branded Federal Reserve chair Jerome Powell an "enemy" for running US monetary policy too tight for the president's liking.
Some British MPs have attacked the governor of the Bank of England Mark Carney for perceived opposition to Brexit, while Urjit Patel,the governor of the Reserve Bank of India, resigned last year after clashing with Narendra Modi's government.
Matteo Salvini, head of the Italian far-right League, has called for the Bank of Italy to be scrapped completely.
Politics is hard for technocrats when their countries are divided and partisans wish to sway them to one side. Officials make convenient scapegoats for populist movements.
While central bankers should avoid politics they must be politically astute. To be effective they need to build support for their decisions, protect their legitimacy and be alive to public pressures.
For the Fed there is an added complication: the central bank must respond to the administration's trade war with China and formulate policy to mitigate its effects on the US.
Powell referred to this, somewhat obliquely, last weekend, saying that trade policy was "the business of Congress and the administration, not that of the Fed". Yet responding to any disruption risks encouraging Trump, who wants to see lower rates and a weaker dollar.
Bill Dudley, a former member of the Fed's rate-setting committee, suggested in a Bloomberg column this week that US officials should strike back. He said monetary officials could "state explicitly that the central bank won't bail out an administration that keeps making bad choices on trade policy".
He suggested the 2020 election outcome was within the central bank's purview since a second Trump term would be a threat to the US economy, so rate setters should consider how their decisions might affect the result.
Matteo Salvini, head of the Italian far-right League, has called for the Bank of Italy to be scrapped completely. Photo / Getty Images
This would be a mistake. There is no painless way to deal with Trump but the Fed should live with its discomfiture. It has two goals: to stabilise the economy and to preserve the independence of the institution. Neither is served by direct conflict with the president.
Central bankers are, ultimately, civil servants and should not use their control over interest rates to put pressure on elected politicians. Dudley's comments risk fuelling conspiracies about unelected officials pulling the strings from behind the scenes.
Central bankers should instead remain calm, stick to their mandate, and tell the truth. Powell is right to point out that monetary policy cannot offset the damage done by the trade war, which hits both the demand for goods and services and the capacity to provide them.
Mario Draghi, European Central Bank president, deftly handled controversy surrounding quantitative easing, responding forthrightly to criticism and pointing out the need for structural reform.
It is right to expect central banks to explain their choices publicly and justify their policies. Politicians in turn have a legitimate role in scrutinising their decisions. Monetary policy affects the distribution of wealth and income. Central bankers wield huge power over markets and the fate of billions.
Politicians' rhetoric, however, can go too far. As well as labelling Powell an enemy, Trump has used the bully pulpit of Twitter to compare him to a golfer who cannot putt and to question his appointment.
Such remarks intend to make the Fed support the president's agenda. The best response is to ignore him. The central bank must do the best job it can in difficult circumstances. The American people will soon learn that not even the Fed can save the US from the follies of Trump.
