Over the past week, a couple of politicians have indirectly questioned the merits of central bank independence. The first person should surprise no one: Donald J Trump, who took time out from his ongoing war of words with Fed chair Jerome Powell to try and sack a different board member:
“Federal Reserve governor Lisa Cook will file a lawsuit challenging her removal by President Donald Trump, setting up a potential standoff between the president and the US central bank.
‘President Trump has no authority to remove Federal Reserve Governor Lisa Cook,’ her lawyer Abbe David Lowell said in a statement.
The president has said there was ‘sufficient reason’ to believe Cook had made false statements on her mortgage, and cited constitutional powers which he said allowed him to remove her.
The unprecedented move comes as Trump has put increasing pressure on the Fed - especially its chair Jerome Powell - over what he sees as an unwillingness to lower interest rates.”
Joe Biden nominated Lisa Cook for her board seat in 2022. She probably shouldn’t have been appointed given her lack of a background in monetary economics—one can’t help but think the fact she’s a black woman influenced the politics of her nomination—but Congress followed due process and confirmed her.
Rules and institutions are important; they’re there for a good reason. And whatever he might think about Cook’s appointment in the first place, Trump is trying to break those long-established and critically important rules by firing her before a finding of guilt.
But it’s really the last part of the quoted text above that gets to the heart of the issue here.
The fact is, unless you’re Javier Milei, political leaders generally want stimulatory monetary policy. Yes, it will mean higher inflation down the road. But politics is by definition a short term game—if you don’t survive the next election, who cares that you kept inflation under wraps? Win the election and deal with inflation when it materialises, e.g. by blaming big business for ‘gouging’, or global supply chains for ‘faltering’.
Cook has voted with Fed chair Powell throughout her term. Trump, a politician who always wants rates to be lower than they are, isn’t happy that Powell hasn’t cut interest rates by as much as he would have liked.
Hence the feud.
The issue is that in the monetary policy world, the credibility of the central bank is vitally important. Trump’s move to fire Cook is a step towards the politicisation of central banking. Markets don’t seem too worried because it’s an incremental shift away from a long-running trend in the other direction, but if he keeps pushing, we eventually end up in Nixon/Burns territory.
But perhaps more concerning is that this behaviour looks to have spread beyond the US. For example, earlier this week New Zealand’s PM, Chris Luxon, publicly weighed in on the forthcoming RBNZ rates decision:
“Luxon on Hosking this morning said he wanted the RBNZ to cut the OCR by 50, not 25bps. Trumpian approach, openly showing disregard for the RBNZ’s independence, by pressuring it to stimulate the economy. Particularly bad at the moment, as the Govt is due to appoint a new Governor.”
That would be bad in normal times, but it’s especially troubling right now because the RBNZ Governor is only there on an interim basis and is actively seeking a permanent confirmation from… Chris Luxon!
Thankfully, back in Australia Anthony Albanese and Jim Chalmers have so far resisted overtly calling for rates cuts, opting instead to simply praise any cuts (read between the lines!). Some of our state premiers have clearly overstepped the mark in the recent past, but they have no direct control over the RBA, so it’s unlikely to have any influence over its independence.
Still, it’s a worrying sign when even New Zealand—the home of independent monetary policy—might be drifting back towards the bad old days when central banking was highly politicised and inflation would regularly run amok.