Donald Trump may have had a point. That’s not a statement one encounters every day, but it may well have been the case in the US president’s recent spat with the Federal Reserve over the direction of interest rates.
We’ll probably never know if Trump’s attacks on Fed chair Jay Powell had anything to do with a subsequent change of tack that saw the latter promise last week that he will be patient in raising interest rates in 2019.
It was rather suspicious that the change in emphasis came after the release of a jobs report showing a robust economy. In his comments, Powell indicated that the dovish tone was in response to a selloff in stock markets in December that was partly blamed on his previous stance that suggested a determination to raise interest rates at least twice in 2019.
The suspicion that the Fed was being too aggressive spooked equity investors, pushing the main stock indexes to their worst December since the Great Depression, and capped the biggest annual drop since the outbreak of the last financial crisis a decade ago.
Despite the strong economic data, Powell said, markets were expressing concerns about the growth outlook, and he sought to reassure them that the Fed would listen “sensitively” and take downside risks into account when setting policy.
Was he responding to bullying from traders who have become accustomed to cheap money and ample central bank liquidity, or to Trump? While he’s unlikely to come clean on that, he’ll be concerned about whether the episode has fed perceptions that the Fed can be strong-armed to serve short-term political goals, endangering its credibility in the long term.
The dangers lurk further on the horizon. The fact that this comes up less than a year before Kganyago’s first term ends won’t go unnoticed by investors.
With their first interest-rate decision of 2019 due this week, SA Reserve Bank governor Lesetja Kganyago and his colleagues on the monetary policy committee would have been watching the happenings at the Fed with some interest. They are also vulnerable to the charge that they made an error in raising interest rates in November, and could, in an election year, come under some political pressure to change their tune.
Those who don’t follow finance minister Tito Mboweni’s Twitter account may have missed the reference to the Bank in the ANC election manifesto launched at the weekend. It’s only mentioned once, about halfway through the document, and Mboweni would like us to believe that part is of no consequence and is best ignored. Which of course raises the question why it was included in the first place.
A generous reading is that this was nothing more than a symbolic sop to the supporters of former president Jacob Zuma who don’t understand how the Bank works. But as the debate about the expropriation of land without compensation has shown, President Cyril Ramaphosa is not immune to populism when under internal party pressure and complacency on this might ultimately prove to be similarly misplaced.
While not in the same league as public protector Busisiwe Mkhwebane’s aborted attempt to get parliament to change the Bank’s mandate, the manifesto’s call for a more “flexible monetary policy regime” is accompanied by language that attempts to link the Bank to an explicit political objective and makes no mention of its its autonomy, enshrined in the constitution.
The supreme law of the country is also brief on the role of the Bank, stating that its primary function is to “protect the value of the currency in the interest of balanced and sustainable economic growth in the republic.”
Kganyago will probably point out on Thursday that this language already commits the Bank to consider “other objectives such as employment creation and economic growth” as the manifesto demands. Monetary policy committee statements always contain an analysis of the economic outlook, so arguing that the Bank doesn’t take these broader issues into account is hardly credible. Whether one agrees with its decisions or not is a different question.
Kganyago, who has successfully taken Mkhwebana to court to defend the bank’s independence, will probably repeat the mantra that monetary policy cannot be a substitute for the structural reforms needed to improve the economy’s competitiveness. Like Powell, in the short term, he has room to play ball and be able to argue plausibly that he’s not succumbing to political pressure. There are many reasons, from the dovish Fed to a weak domestic economy, to keep rates steady,possibly for the whole 2019.
The dangers lurk further on the horizon. The fact that this comes up less than a year before Kganyago’s first term ends won’t go unnoticed by investors. Changing the Bank’s mandate might not be on the agenda, but the appointment of a more pliant governor cannot be ruled out, and that would be a disaster for the country.
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