Why Trump prefers Mario Draghi to Jerome Powell | Business

CBankers entral seldom say anything that remains in memory. Mark Carney has been at the Bank of England for six years and is recognized as the central banker of the rock star, and not always in a good way. His answers to the questions of the press conferences often resemble the solos of the lead guitarist of a progressive rock band of the 1970s: long and boring.

Indeed, only two central bankers have ever mentioned what we could call zingers. William McChesney Martin, who led the US central bank for nearly two decades from 1951 to 1970, said the Federal Reserve was in a "chaperone" position that had ordered the removal of the punch bowl just as the party was really getting ready. "

Fifty-seven years later, Mario Draghi was appearing at a conference in London at a time when intense pressure on Italian and Spanish bond yields had fueled speculation about the collapse of the single European currency. The ECB President replied that the bank was "ready to do whatever is necessary to preserve the euro." And believe me, that's enough.

Donald Trump, it's fair to say, does not have much time for Martin's central bank theory. The man he named at the head of the Fed, Jerome Powell, tried to suppress the punch bowl by gradually increasing interest rates and received abuse only from the house. white.

The president wants the party to continue and get out of it. This week, the Federal Reserve is expected to lower US interest rates by 0.25 percentage points, not because of the economic recession – the annual growth rate is just over 2% and the unemployment rate is at its peak. lowest level for 50 years – but as insurance against a possible slowdown. Trump will almost certainly blame Powell for being too shy. While his reelection campaign in 2020 is already in full swing, the president is after half a point on the rates.

In retrospect, Trump made a mistake in deciding to replace Janet Yellen, an ultra-dove Fed, for no other reason than this one, a Democrat named by Barack Obama. And given the choice, he would choose Draghi rather than Powell.

Why? Because during her stay in Frankfurt, Draghi transformed the ECB so that she was no longer a clone of the German Bundesbank on which she was modeled. The ECB had been extremely orthodox during the financial crisis and its immediate consequences, too slow to attempt the monetary creation process called quantitative easing and too fast to raise interest rates. Over time, Draghi has used his opposition to a more activist approach, to the point that his last months at the ECB will see the bank cut interest rates and resume QE. The old deflationary bias – the ECB generally cared more if inflation was greater than 2% rather than less than 2% – also disappeared.

Current developments at the Fed and the ECB show how much the central bank has changed. Under the Gold Standard, monetary policy and interest rates were governed by whether gold was imported into a country. It was the central bank 1.0.

Martin's quote sums up the 2.0 central bank. Fiscal militancy has marked the culmination of fiscal activism: managing the economy through changes in taxes and expenses. Central bankers tended to be technocrats operating under the political spotlight. There is a story that President John F. Kennedy could only remember the name of the head of the Fed, because his name started with an M, like monetary policy.

At the time of "all that was needed", central banks had become more powerful and more visible. The use of fiscal policy had become fashionable and monetary policy – controlling the economy through the levers of interest rates and the money supply – was sovereign. When the 2007 financial crisis turned into a financial crisis, it is up to independent central banks that governments have sought to mitigate the effects. This was the culmination of the 3.0 central bank.

But the decade since the financial crash has revealed the limits of central banks, even in hyperactive mode. Martin's metaphor was quite appropriate in 1955 because the post-war American party was in full swing, with full employment, strong growth, and a high standard of living for all. The party since 2008 has been small and exclusive, largely limited to the 1% of the richest.

In addition, interest rate cuts such as the ones the Fed is going to propose this week are much more about keeping the spirit high on the financial markets than the real economy. It was the collapse of stock prices on Wall Street in the last three months of 2018 – rather than anything on Main Street – that changed Powell's mind.

Andy Haldane, the chief economist at the Bank of England, gave a speech last week to recognize the new reality. Central banks have done everything to stimulate demand. Low interest rates and the quantitative easing program have made it possible to absorb all available capacity – unemployed people looking for work, companies that can produce more goods and services – left by the worst recession since But now, Haldane said, the time has come for fiscal policy and structural reform to play a bigger role.

It seems right. In the end, there will be another global recession and its management will require a different approach from that used in 2008-09. Monetary policy will become relatively less important and the border between it and fiscal policy will become blurred. Hybrid less technocratic and more political of the Martin era and the Draghi era, it will be a central bank 4.0.