The last time Donald Trump tried to bully the Federal Reserve into doing his bidding on monetary policy, it seemed to work, and in the eyes of many the independence of the US central bank was compromised.
Breaking with decades of precedent and what is now conventional practice in successful economies around the world, the US president inserted himself into the debate about the correct level of interest rates, blaming Fed chair Jerome Powell for a drop in stocks and calling the institution “out of control”.
How much bearing these attacks and those from his surrogates, including an economist and TV commentator of questionable ability that he is apparently considering for nomination to the Fed’s board of governors, had on policy makers changing their tune and going dovish is still subject to debate.
The majority view is that this is exaggerated and the main driver of the policy U-turn, from preparing the market for two interest-rate increases of 25 basis points each in 2019 to saying they probably won’t move at all, was what one can describe as a market backlash against the previously hawkish stance that they saw as being unjustified by the economic outlook.
With the Fed raising interest rates on December 19 and indicating more to come, the end of 2018 was dreadful for US stocks, with both the S&P 500 and the Dow Jones Industrial Average having their worst December since the 1930s, and their biggest annual drops in about a decade.
This, rather than Trump’s attacks on the central bank, was seen as the reason why the Fed changed direction.
Central banks are supposed to be forward looking when setting policy, with a time horizon that’s usually much longer than the couple of weeks it took for Powell to move from actually hiking rates and talking up the health of the economy, to indicating a pause.
But the markets liked it. After falling almost 14% in the last three months of 2018, the S&P 500 jumped about 13% in the first quarter of 2019, the best performance since late 2009.
Central bankers from across the globe, including our own, whose independence and policy choices have been questioned amid the political noise ahead of the May 8 elections, are gathering in Washington this week as part of the annual spring meeting of the International Monetary Fund and the World Bank. It’s likely that Trump’s latest utterances will surely be part of their informal discussions.
Just after the release on Friday of data showing US job creation beat analysts’ forecasts in March while the unemployment rate is still at lowest levels in almost five decades, Trump came in with an even wilder suggestion: nNot only should the central bank be cutting rates, it should resume quantitative easing.
Quantitative easing involves the central bank printing new money and seeking to lower borrowing costs in the economy by buying government bonds and other securities.
From Sweden to Japan, central banks pursued it as a last resort, fearing the other option would be a prolonged period of deflation, a persistent and generalised drop in consumer prices that has the potential to kill demand, prolong an economic slump and threaten the financial sector, among other unpleasant things.
When that policy was introduced in 2008, the Fed was run by Ben Bernanke, an expert on the Great Depression who was determined to prevent a repeat. And Trump and his fellow Republicans were among the biggest critics in subsequent years, seeing the policy, introduced towards the end of George W Bush’s second term, as politically motivated to help then president Barack Obama. It’s no surprise that now they are in power and facing an election in 2020, they see nothing wrong with quantitative easing.
While no serious economist believes the US economy needs lower interest rates or quantitative easing, the stock markets still rose in the wake of Trump's comments on Friday. Which might well be an indication that traders may not be so dismissive or complacent about the president’s ability to influence the Fed. If a cut does materialise, the justification will be interesting.
As part of the broader attack on the Fed's independence, Trump is believed to be considering nominating to the Fed board Stephen Moore, a former adviser to his campaign who just over three months ago was calling for Powell to be fired for wrecking the economy. In the running for another slot is former Republican presidential candidate and Trump loyalist Herman Cain, who once called for the return of the gold standard.
When a president's adviser is moved to declare that “we are not going after their independence” as Larry Kudlow did to Bloomberg on Friday, it’s usually a sign that the horse has bolted.
With President Cyril Ramaphosa still to appoint a deputy governor to replace Francois Groepe, one can only hope that the ANC isn’t looking to the US for inspiration.
With the terms of SA Reserve Bank governor Lesetja Kganyago and his deputy Daniel Mminele due to end in 2019, it might well be a good thing that the thinkers at Luthuli House are preoccupied with the Bank’s shareholding rather than where they could exercise real, and destructive, influence.
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