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By Howard Schneider
WASHINGTON (Reuters) – While the global financial crisis was spreading in September 2008, the US Federal Reserve reunited in an atmosphere of urgency as demands from other central banks for get access in dollars flocked.
The swap lines that the Fed quickly approved helped ease financial strains in foreign markets, but also showed that the US central bank was ready to support the global system.
Would an "America First" Fed do the same?
The question is suddenly relevant to world economic leaders and central bankers after President Donald Trump took the initiative to appoint two powerful supporters on the Federal Reserve Board.
Economic commentator Stephen Moore and businessman Herman Cain both criticized the Fed's policies. Moore is particularly opposed to the extraordinary measures used to stabilize the economy through the deepest crisis since the Great Depression.
If Trump forms a Fed that responds first to its policy, this could upset the situation for other central banks and a global financial system dependent on the dollar and whose fortunes can change dramatically according to the decisions of the Fed.
"I am certainly concerned about the independence of the central bank in other countries, especially … in the most important jurisdiction in the world," said European Central Bank President Mario Draghi, in Washington, at the spring meetings of the International Monetary Fund and the World Bank.
Sensitive moment
Trump's decision to consider close political allies for the central bank comes at a sensitive time for the global economy and the IMF. Last week, Christine Lagarde, Managing Director of the Fund, asked member countries to strive to "do no harm", but its largest shareholder, the United States, has become a source of concern.
Trump's ongoing commercial battles have been cited to explain the slowing of global growth, and the idea of a stacked Fed with officials first examining the US political calendar makes foreign central bankers nervous.
The IMF welcomed the steady evolution of Fed policy under Jerome Powell's presidency, but Trump demanded that he lower rates and Moore endorsed that idea.
The actions of a central bank often have an impact on the economies of other countries. But the rule of thumb is to define policy as much as possible on the basis of an isolated badysis, not to obtain a short-term commercial or political advantage.
If the Fed were cutting rates to counter the US slowdown, that would be one thing. But transforming a generally healthy economy to make Trump look good would send a bad signal – and hurt countries that are struggling with their own economic problems.
Lower rates could weaken the dollar, boost US exports and appeal to one of the main goals of the Trump campaign to increase manufacturing jobs in the United States. However, it would be difficult for the Bank of Japan to follow its own strategy of targeting specific levels for long-term bond yields and undermining growth in Europe that the European Central Bank is trying to support. Emerging markets could see destabilizing capital flows.
"Can we count on a politicized Fed to do what it did in 2008, when it was the last donor for the world – you should really worry about that – rather than becoming the most a big supporter of stability, the Fed suddenly becomes an agent of instability, "said Jacob Funk Kirkegaard, a researcher at the Peterson Institute for International Economics.
Some of Trump's policies have already led European financial leaders to think of ways to strengthen the euro as a reserve currency, the excessive influence of the dollar on global markets leaving Europe vulnerable to US policy decisions.
POOR HISTORY FOR POLITISED FOOD
Moore and Cain have not yet been officially named and Cain's outlook is rather bleak. Fed governors must be approved by the US Senate, and enough Republican legislators have opposed Cain to escape his chances.
Moore, for his part, sent mixed signals about his policy, but in general criticized the markets flooded with dollars by the Fed with dollars during the crisis and its aftermath. He preferred to link the Fed to a strict rule, based on commodity prices. Critics of rules-based monetary policy cite its lack of flexibility to react to unforeseen events.
The Fed had deeply political governors before, perhaps especially in the 1980s, when a group loyal to President Ronald Reagan opposed the policy set by its president Paul Volcker, said William English, former head of the monetary affairs division of the Fed. a teacher at Yale.
They did not succeed, said Mr. English, evidence of the influence of a strong Fed chairman and the limits of an individual governor in a technocratically strong institution, and in a panel policy with a maximum of 19 people. Twelve of them are also appointed by the regional banks out of reach of the president.
But before Volcker, he said, the Fed had molded its policy well on the claims of presidents Lyndon Johnson and Richard Nixon and had no doubt contributed to the galloping inflation of the 1970s.
"We did this experiment … The result was bad," he said.
For the IMF and other global institutions, the problem is greater if the world's dominant economy moves away from the standards recommended for other countries, as the Trump government has already done on trade. Whether it is a potential for unhindered government borrowing or a politicized central bank, the United States may be writing a scenario that other less resilient countries might be tempted to follow.
"The fund likes to live in a world (…) where all its members are treated fairly," said Nathan Sheets, former under-secretary of the Treasury for International Affairs and now chief economist at PGIM Fixed Income. If the US starts to open the Fed to partisan politics or move away from other standards, "that's a risk to them."
(Additional report by Balazs Koranyi, edited by Andrea Ricci)
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