WASHINGTON (Reuters) – The financial crisis spreads across the globe in September of 2008, the US Federal Reserve.
A Street Wall Street is New York Stock Exchange (NYSE) in New York City, U.S., March 7, 2019. REUTERS / Brendan McDermid
The "swap lines" that the Fed is rapidly expanding, but also showed the central bank was prepared to stand behind the global system.
Would an "America First" Fed do the same?
The President of the United States, Donald Trump, President of the Federal Reserve Board.
Both economist and commentator Stephen Moore and businessman Herman Cain have been critical of Fed policies, and Moore in particular has contrasted the effects of stabilizing the economy through the deepest crisis since the Great Depression.
Should Trump shape a Fed that answers first to his politics, it could be the case for other central banks, and for a dollar-dependent world financial system whose fortunes can swing dramatically based on Fed decisions.
"I am certainly worried about central bank independence in other countries, especially … in the most important jurisdiction in the world," said European Central Bank President Mario Draghi, in Washington for spring meetings of the International Monetary Fund and World Bank.
Trump's decision to consider close alliances for the central bank at a sensitive moment for the world economy and the IMF. Fund Managing Director Christine Lagarde last week in the United States, has become a concern.
Trump's ongoing trade has been cited as global growth is slowing, and the idea of a central bankers nervous.
Jerome Powell, goal Trump has asked for the cut rate and Moore has endorsed the idea.
The actions of one central bank often impacts the economies of other nations. But the rule of thumb is not possible, but it is possible to get a better policy.
If the Fed were slow to cut it, it would be one thing. But juicing has mostly healthy economy to make it look good.
Lower rates could weaken the dollar, boosting U.S. exports and appealing to a core Trump campaign of expanding U.S. manufacturing jobs. But it would make it harder for the Bank of Japan to follow its own strategy of targeting specific levels for long-term bond yields, and undercut growth in Europe than the European Central Bank is trying to support. Emerging markets could see destablizing capital flows.
"Can a politicized Fed be relied on to do what it was in 2008, when was the last resort for the world? "You would really have to worry about this – that, rather than the strongest proponent of stability," said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics.
Already some of Trump 's policies in the European financial markets. Europe vulnerable to U.S. political decisions.
POOR HISTORY FOR POLITICIZED FED
Both Moore and Cain have been formally nominated, and Cain's prospects look bleak. Fed governors must be approved by the U.S. Senate, and enough Republican lawmakers have come out against Cain to scuttle his chances.
Moore, meanwhile, has mixed signals about its policies, but in general has criticized the Fed's flooding markets during the crisis and its aftermath. He has favored tying the Fed to a strict rule, based on commodity prices. Critics of the rule-based monetary policy quotes its lack of flexibility to respond to unexpected events.
The Fed has had deeply political governors before, perhaps most notably in the 1980s when a group loyal to then President Ronald Reagan and Paul Volcker, said William English, the head of the Fed's monetary affairs division and now a professor at Yale.
They did not succeed, English said, evidence of the influence of a strong leadership and an effective policy of 19-member policy. Twelve of them, moreover, are appointed by the president.
But before Volcker, he said, the Fed did preside over the demands of Presidents Lyndon Johnson and Richard Nixon, and arguably contributed to the inflation run of the 1970s.
"We did that experiment … The outcome was bad," he said.
For the IMF and other global institutions, there is a different issue if the world's dominant economy, as the Trump administration has already done on trade. Whether it is the potential for unhindered government borrowing or a politicized central bank, the United States may be writing a script that other, less resilient countries, may be tempted to follow.
"The Fund's likes to live in a world where all of its members are treated evenhandedly," said Nathan Sheets, an under secretary of the Treasury for International Affairs and now Chief Economist at PGIM Fixed Income. If the United States starts opening the Fed to partisan politics or shifting away from other norms, "that is a risk for them."
Additional reporting by Balazs Koranyi; Editing by Andrea Ricci