Resistance would risk antagonizing politicians and exposing the central bank to bigger and more enduring structural damage. But agreeing to political demands that have no economic justification would lead to central banks abrogating their policy objectives. And whatever they end up doing, communication is always very tricky -- exposing the institution to major reputational harm and other risks.
No. 3. That’s why central banks prize their structural autonomy so much, as do economists
Because of all this, many central banks have sought and secured varying degrees of autonomy. In many cases, this involves the freedom to decide on the tools to use to meet objectives that, although specified by politicians, are not easy to change. (This is what economists call instrument independence but not goal independence.) To make sure that structure does the heavy lifting, central-bank autonomy is often established by legislation.
The desirability of central-bank autonomy is one of the few things that the vast majority of economists readily agree on. It is seen to have played a key role in breaking inflationary spirals, including in the 1970s, that disrupted many advanced and emerging economies. And, when just less than 10 years ago the global economy was facing the real and present danger of falling into a devastating multiyear depression, autonomy ensured that central banks had the leeway to deploy unconventional policies. That is something for which we should all be grateful.
With this as background, expect the Fed to respond -- very carefully -- in the following way to Trump's tweets:
In both the run-up and aftermath of this week’s FOMC meetings, officials will do their utmost to avoid any public commentary on the issue. They will work hard to side-step the remarks during their policy deliberations, which will continue to be driven by pure economic, financial and market considerations. The policy decisions they iterate to, including what to signal about the timing and number of hikes in the remainder of this year, are unlikely to be reflect in any material way President Trump’s expressed views on monetary policy.
This, however, will not make the Fed’s public communication task any easier. Indeed, whatever the Fed decides to do, it will be blamed by someone somewhere to have fallen under the influence of the president in one of two ways: Succumbing to his pressures if it decides on Wednesday not to signal high likelihood of a rate hike in September; and, should it indeed send such a signal, be accused by some to have gone too hawkish in order to show that it prizes its independence.
There are good reasons why so many have warned politicians away from commenting on central banks. We will likely see some of the underlying reasoning play out again this week even though the Fed will end up behaving exactly as it would have had Trump not commented on its policies.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco.
This column was provided by Bloomberg News.