The US Federal Reserve seems to be doing a slow U-turn on its previously hawkish monetary policy stance. Jerome Powell’s latest calming words have reassured financial markets and led to a small stock market rebound (at least for the moment). Is this a good thing?
The first question that arises is the extent to which central banks should be concerned about stock market performance rather than the performance of the real economy. And whether the Fed is embedding the idea that economies can now only survive and prosper on the back of loose monetary policy. Global private and public debt has already reached the stratosphere. Previous periods of monetary stimulus, notably under Alan Greenspan, created asset bubbles that eventually came crashing down. Are we headed down the same road?
Central banks are now in a bind. They have left monetary tightening to a period that is late in the cycle. The next downturn feels as though it is around the corner. But they have no more bullets left in their armoury. The Fed’s attempt to tighten rather quickly may well not only have been a reaction to a US economy that seems to be growing well and inflation that is creeping up. It may have been an attempt to position the Fed to be able to do something to soften the next downturn when it inevitably occurs. That all seems to be unraveling.
But there is another issue that deserves comment. For the past two years we have been banging on about what should be the limits to central bank independence. President Trump has been relentless in criticizing the Fed for its tightening. As a result, he has been the subject of constant opprobrium from economists and others who cling to the religion of absolute independence of central banks. Now many are praising the Fed for its U-turn. Should we conclude form this that Trump was right and the Fed was wrong after all?
The first leader in the latest edition of the Economist (published before the Fed U-turn) was an endless tirade about the Trump presidency. One particular sentence caught my attention: “[President Trump’s] criticism of the Federal Reserve chairman, Jerome Powell, for being too hawkish will, if anything, only make an independent-minded Fed more hawkish still.” The author was clearly wrong about that. But, more importantly, it is as though the assertion of independent action (which the Economist seems to believe must inevitably go against whatever views are expressed by politicians) was a more important factor in central bank decision making than doing what is right for the economy. This is clearly nonsense.
We will continue to press for further debate about the nature and limits of central bank independence in any democracy – where momentous decisions that affect people’s lives cannot be left solely to unelected and largely unaccountable technocrats – for the reasons we made clear over two years ago in this report. But it is also time that we all accepted that central bankers are not deities that speak with some kind of unchallengeable infallibility. They are human beings like you and me. They are well informed, make some good decisions and also sometimes get things wrong. This lionization of central banks and their right to make decisions unhindered by democratic accountability must stop.