There’s a long and proud tradition of politicians nudging (and occasionally pushing) central bankers to act a certain way.
I think we all secretly suspect politicians, central bankers and private bankers to be in cahoots together, though we’d probably find this hard to prove.
Government leaders tend to make sure they’re not seen commenting on central bank policies, let alone criticising them.
That way we can all pretend there’s no colluding going on behind the scenes, thinly veiled as this illusion might be.
Donald Trump isn’t like other presidents. He doesn’t stick to tradition or etiquettes.
What else could we expect but for him to go on TV and social media to openly disagree with the Federal Reserve? Which is, of course, precisely what he’s done.
It made me wonder if central bank independence has always been a myth and what degree of political meddling there’s been…
At the same time, I started thinking if this influence was just a one-way street or if these unelected bureaucrats were actually the ones pulling the strings…
And who better to discuss this with than best-selling author of All The Presidents’ Bankers and Collusion: How Central Bankers Rigged The World, Nomi Prins?
Independence in word not in fact
We all know central banks’ independence from the government is meant to be enshrined by law, but does it really exist in practice?
Time to catch up with an authority on the subject and get some answers!
Banker turned financial journalist Nomi Prins has spent the better part of a decade writing about power and money. Specifically how elected and unelected leaders use both to influence policy.
When I bring up the relationship between politics and central banks, Nomi starts off by explaining that central banks have never been truly independent from the government or from the banking sector.
“The Federal Reserve Act of 1913, as I discuss at length in my book, All the Presidents’ Bankers, was a by-product of intense collaboration between Congress and the banking community.
“This took place in the wake of the Panic of 1907 after which JP Morgan decided that there needed to be a bank of last resort for the major banks, so that in an emergency, they actually wouldn’t have to rely on the government because the government at the time, had a questionable record itself.”
There you go… Bankers and politicians all carefully planned this out together from the start.
They still often appear to be working hand in glove just like they must have been when they created the Fed.
I mean the President can already exert influence on the Fed by picking or replacing its chairman. Doesn’t that process already leave itself open to politics influencing the central bank?
“Yes, the President always nominates the Chair of the Board of Governors of the Fed and Congress, by law, can approve or reject the nominee. It has never rejected the nominee.
“That said, there are degrees of decorum that have been adopted over the years to provide the illusion of complete independence as technically the law suggests. There are also Chairs that have acted more independently than others over the past decades.”
Fed chair Arthur Burns listened to President Nixon in the 1970s, while President Trump doesn’t exactly hide the fact that he’s trying to influence the Fed’s policies as well…
Does this kind of pressure from governments on central bankers to act out of political considerations happen all the time?
“The fact that the Fed listened to Nixon (to the economy’s detriment) in the 1970s and that this Fed might listen to Trump – in a very different environment entirely from the 1970s – are outliers from the standpoint of explicit influence.”
Trump is a factor
Central bankers are far from operating in a vacuum.
And with a president as determined to speak his mind as Trump, it’ll be hard for Fed chair Jerome Powell to completely evade political influence.
But even though Powell was appointed by Trump, the times that central bankers were completely in the pockets of their presidents is over. Trump can’t lean on Powell the way Nixon leaned on Burns to get interest rate hikes reversed.
In fact, a lot of market watchers are now pretty much factoring in a September rate hike. And the Fed has more or less announced another rate increase later this year, most likely in December.
This would go against the wishes of the Trump administration, which fears rate hikes will undo the effect of its tax cuts on the economy.
With this in mind, how may Trump’s public statements influence the Federal Open Market Committee when they’re deciding monetary policy?
“I believe there will be a rate hike in September of 25 basis points. But I also believe that Powell has left the door open for the possibility of not raising rates in December.”
Surely, Powell is not going to let the president set interest rate policy again? Hasn’t he learned anything from the 70s?
“Though he would not admit this decision has anything to do with Trump’s comments, those, plus other reasons, like where we are at from the standpoint of trade wars, how volatile the markets are at that point, how healthy the banks are at that point, and other extraneous geopolitical or other financial factors, could cause the outcome of no rate hike in December.”
Roles are reversing
So Fed chair Powell may take the president’s view into consideration when he makes up his mind about the central bank’s interest rate policy…
Still, there’s no question that the status of central bankers has increased considerably in the past decades.
They don’t roll over anymore when presidents tell them their political motives for a certain course of action take precedence over their better judgement.
And it’s not just that central bankers are no longer letting the government tell them how to do their job. They’re now quite comfortable with telling the government how to do theirs.
On the BBC’s Today programme, Bank of England governor Mark Carney talked about the “uncomfortably high risk” of a no-deal Brexit and called this scenario “highly undesirable”.
Well, that rather undermines the government’s stance that “no deal is better than a bad deal”, doesn’t it?
“Carney has, over the course of his period at the helm of the Bank of England, been actively vocal about his opinions on Brexit, and how different forms of Brexit might impact the UK economy.”
Carney knows his voice carries weight in a political hot potato like Brexit, especially when it comes to its impact on the economy.
It’s hard not to see his comments as a political intervention intended to put pressure on Prime Minister Theresa May to get a deal with the EU at all costs.
“This is yet another sign of Carney, as similar moves are by other major central bank leaders, using his position to gain more influence over the course of finance, markets, trade and the economy – and by extension, politics.”
And so, all of a sudden, this tale of central bankers has become the oldest story in the book…
What do all people with power want?