We live in such strange times that most people don’t even notice how quickly certain principles that until not long ago appeared fundamental for Western societies are being eroded.
One of these principles is the independence of central banks. I have warned about this before, when I said that because central banks have responded to the crisis the way they did – printing money and cutting rates to the floor (or even below in certain cases) – they opened themselves up to criticism.
(A friend of mine once told me how a young girl asked her: “You are young, right?” “Yes, I am young”, my friend answered, delighted that she appeared young to a child. “And,” continued the child, “you’ve been young for a long time, right?”
The same applies to central banks’ “extraordinary” policies of purchasing bonds, mortgage-backed securities or even equities. They have been extraordinary for a long time. So long, in fact, that what we saw in the markets last week is just the beginning of the realisation that money printing is not business as usual.)
But, central banks have no choice. As the Bank for International Settlements warned (in a research paper, not in official capacity), low-for-long interest rates are hurting financial stability around the world. They have inflated asset price bubbles and driven up debt, and there are no monetary policy tools left to tackle the next financial crisis.
In other words, financial penicillin is losing its effectiveness, but the patient is throwing a tantrum because the doctor has stopped prescribing it.
Who will blink first? The doctor (central banks) or the patient (the markets)? So far, the central banks have continued down their ever-so-gentle path towards “normalisation” of monetary policy – interest rates could even become real positive in some countries, after spending most of the past decade firmly below zero.
But central banks’ independence, the bedrock of their policies, is at risk. President Trump’s latest outburst against the Federal Reserve, albeit in line with the president’s taste for hyperbole, cannot be dismissed as simple banter. The US media has quoted him as saying this:
“The problem that I have is with the Fed. The Fed is going wild. I mean I don’t know what their problem is but they are raising interest rates and it’s ridiculous.“
“The problem in my opinion is Treasuries and the Fed. The Fed is going loco and there is no reason for them to do it and I’m not happy about it.”
Trump blamed the Fed for last week’s stock market plunge – although, generously, he added that he will not fire Fed chairman Jerome Powell, whom he himself appointed.
All this bellicose rhetoric from a president whom many people see as the world’s most powerful doesn’t bode well for central bank independence. Politicians in other countries could use Trump’s example to start putting pressure on their own institutions’ monetary policy.
So what, some people may say. Central bankers have picked winners and losers after the financial crisis with their policies, and they’re not even elected.
But if central bankers do lose their independence, the consequences won’t be pretty. If there are people still wondering what these could be, they certainly haven’t been paying attention to what happened in Turkey in August this year.