Trump attacks on Fed trigger global alarm

Donald Trump's attempts to influence the US Federal Reserve have raised the concern of policymakers in Washington, as economists fear that the apparent absence of an inflationary threat will help politicians call for a more flexible monetary policy.

In the spring meetings of the International Monetary Fund and the World Bank, officials defended the Fed following Trump's attempts to appoint two political allies to his board of directors, and asked him to lower rates and to revive quantitative easing. The Fed is not the only one facing a threat to its independence: Turkish and Indian central banks have also been pressured to ease their policy in recent months.

"I am certainly concerned about the independence of the central bank in other countries, especially in the [US], the largest jurisdiction in the world, "said Mario Draghi, President of the European Central Bank. With 19 governments, the ECB had an advantage because the opinions of different governments were generally contradictory, he said. But he stressed that independence was crucial for the credibility of decisions taken by central banks to regulate the economy.

"Populism on the left and right is also taking over central banks," said Tharman Shanmugaratnam, Singapore's deputy prime minister and chairman of his central bank. Political pressure "poses a real risk of encouraging, inducing and constraining central banks into much larger, quasi-fiscal roles."

Economists fear that, given stagnating growth rates and the absence of inflation, central banks are likely to face growing political demands for a more flexible policy. In a conference last week, Kenneth Rogoff, an economist at Harvard, warned that central bankers were traditionally able to warn that, if they were not independent, "the devil would be unleashed and l & # 39; Inflation would be high. " However, this threat seemed no longer urgent given the low price growth in the world, which could reduce the need for perceived independence.

The independence of the big central banks seemed badured after they had mastered the scourge of inflation and contributed to the efforts to combat the financial crisis and its mitigation a decade ago. While governments' budget deficits have exploded and fears of a debt crisis have widened earlier in the decade, central bankers have become the only game in town to stimulate the economy and appease the panic of the market. That's what Mr. Draghi said in 2012 in his comment: he would do "all that is needed" to resolve the eurozone crisis, a comment that immediately marked the moment when its intensity began to fade.

This high watermark has long since disappeared and today 's discussion is about the badault on central bankers. In a presentation on the independence of central banks, Rogoff, a former chief economist of the IMF, explained that some of them had been too "rigid" in setting targets for the central banks. Inflation when greater flexibility was needed and taking credit for the good times was not justified.

He set out a number of additional reasons for the challenge facing central banks – including the lack of inflation, the lack of tools to boost economies when interest rates are low and the lack of skills. in central bank fiscal policy, which limits their ability to advise governments on stabilization when monetary policy runs out of ammunition.

Now, the attitude: "Thank you very much the independent central banks, you did a great job, we really enjoyed it, we do not need you anymore," Rogoff said. Although this point of view is getting stronger, it was almost certainly wrong, as inflation would come back at some point, he added. "Totally undermining the independence of central banks, countries that do, including the United States, will live with regret," he said.

Among the concerns expressed at the IMF Spring Meetings, more optimistic voices were expressed. Axel Weber, the former president of the Bundesbank, stressed that the attempt at political interference was not new. He pointed to the unsuccessful attempts of former German Chancellor Konrad Adenauer to put pressure on the central bank in the 1950s, and more recently of former French President Nicolas Sarkozy when Mr. Weber was a member of the Council of governors of the ECB. "My answer was: who cares what Mr Sarkozy thinks?" Recalled Mr Weber.

"The credibility, sovereignty and independence of the Fed are in no way under threat. The Fed knows what to do, "said Friday Mr Weber, currently chairman of UBS. "We just have to be aware that we have to stay the course despite the calls of politics to do something else."

The Fed, currently chaired by Jay Powell, has itself opposed political lobbying in the past. In an interview with Paul Volcker published as part of a Fed oral history project, the former president was called back in 1984 to the White House Library for a meeting with Ronald Reagan and his chief of staff at the time, James Baker. "The President wants to give you an order," said Mr. Baker: make sure the rates are not raised before the election. Mr. Volcker said that he had not responded to the men. "It was not jovial, but the silence of President Reagan seemed to cause some discomfort," he recalled in the interview conducted in 2008 but published on the Fed website Friday.

Some politicians have recognized the tension that politics now imposes on central bankers. UK Chancellor Philip Hammond said the political storm around Brexit was making it more difficult for the UK to attract the talents of the central bank, which is looking for a successor to Mark Carney at the Bank of America. 39; England. "Some candidates could be deterred from candidacy because of the political debate around Brexit, which the BoE governor can not avoid being part of," he said.

Christine Lagarde, Executive Director of the IMF, stressed that central banks still have great power in the global economy. These were "bright spots" in the global landscape, she said, praising their willingness to turn around and become more accommodating as the slowdown settled in the year. last, which had an "almost instantaneous" impact.