Reserve Bank governor Lesetja Kganyago owes Donald Trump a peculiar debt of gratitude.
The US president’s brazen attempt to oust Federal Reserve chair Jerome Powell has inadvertently provided a textbook example of the perils of political interference in monetary policy.
For Kganyago, Trump’s comments serve as a vivid cautionary tale, a reminder to his political masters of the chaos that could ensue if they dared meddle in interest rates policy.
“With these costs trending so nicely downward, just what I predicted they would do, there can almost be no inflation, but there can be a SLOWING of the economy unless Mr Too Late, a major loser, lowers interest rates, NOW,” Trump said in a social media post on Monday, repeating his criticism of Powell, who says rates should be lowered until it is clearer that Trump’s tariff blitz won’t lead to inflation.
In reaction, US equities slumped, the dollar hovered at multiyear lows versus the euro and Swiss franc, and longer-dated US treasury yields rose. If and when Powell is ousted, there would be “violent reactions in markets”, Reuters quoted Jamie Cox, MD at Harris Financial Group, as saying. Markets aren’t reacting out of love for higher interest rates per se, to be sure; they are reacting to the manner and motive of the intervention. A cut to interest rates initiated by the Fed on its own terms might cheer markets, but a cut coerced by the White House would terrify them.
Trump’s antics have inadvertently provided Kganyago with a powerful argument for maintaining the Reserve Bank’s independence.
A “violent reaction in markets” would underline the damage to the Fed’s world-renowned credibility, which rests on its historical independence. Investors are rattled by the prospect of a Fed chair beholden to political whims rather than economic prudence. And by repeatedly attacking Powell and hinting at regime change, Trump has also introduced a new uncertainty premium into the markets. Some of the damage is already done and could worsen if the showdown escalates.
Ironically, Trump’s attempts to fire Powell have had the opposite effect of his intentions. By establishing markets, he has, in all innocence, tightened financial conditions, making it even harder for the Fed to lower rates. To add, if Trump were to actually fire the Fed chair, it would prove exactly the kind of recession he fears Fed policy might cause. It’s a classic case of shooting oneself in the foot — a lesson for any self-respecting political principal.
For SA, the implications are clear. Kganyago has long championed the independence of the central bank, often clashing with political figures who advocate for more populist monetary policies over sound policies.
The Trump-Powell saga underscores the dangers of such interference. Imagine a scenario where the Bank is stripped of its autonomy, with interest rates dictated by political agendas rather than economic realities. The result would be catastrophic: soaring inflation, the stealthy thief that steals from the poor, a battered rand and a haemorrhaging of investor confidence. The message to SA’s leaders couldn’t be clearer: hands off the Reserve Bank.
Kganyago should seize this moment to reinforce the importance of central bank independence. The moment the central bank’s independence can be questioned, it would be a precedent that could prove costly in the long run.
Credibility, once lost, is hard to regain — whether for a central bank or a country. SA’s image as a stable emerging market relies in part on the belief that, come what may, the Reserve Bank will do the right thing for the economy, not for any one politician. By standing firm against calls for populist policies, Kganyago can ensure the Reserve Bank remains a bulwark of stability in an increasingly volatile world.
Trump’s antics have inadvertently provided Kganyago with a powerful argument for maintaining the Reserve Bank’s independence. The US president’s actions have shown the world what happens when monetary policy becomes a political tool. For that, Kganyago owes Trump a thank-you. But let’s hope SA leaders don’t need a similar wake-up call to learn the same lesson.
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