The “heyday of central bank independence now lies behind us,” Pacific Investment Management Co.’s Joachim Fels declared Saturday.
He is not alone among economists in delivering the last rites after Turkish President Recep Tayyip Erdogan fired his country’s top monetary policy maker and President Donald Trump continued to attack Federal Reserve Chairman Jerome Powell for raising interest rates too high.
Even the European Central Bank, which is generally viewed as the institution most protected from politics, felt a bit of heat over the weekend as the head of Germany’s ruling Christian Democratic party said incoming ECB chief Christine Lagarde should shift monetary policy to make it comply with the bank’s inflation-targeting mandate.
“Like it or not, get used to the new normal of dependent central banks, perpetually low interest rates and quantitative easing,” Fels, Pimco’s global economic adviser, said in a report.
Here are links to our QuickTake on why monetary institutions are becoming political punching bags, and a recent analysis by Bloomberg Economics.
What follows is a country-by-country guide:
U.S.
Powell has endured increasingly harsh criticism from Donald Trump, the first American president in almost three decades to lash out publicly at the Fed. In remarks that seem aimed at setting the Fed up to take the blame if the economy falters as he seeks re-election, Trump has called on the central bank to slash interest rates and resume bond purchases. On Sunday, Trump said if the Fed “knew what it was doing” it would cut its benchmark rate. Last week he nominated economists Judy Shelton and Christopher Waller to seats on the Fed’s board of governors. Both are thought likely to back lower interest rates, and a person familiar with the matter said either may be in line for the Fed’s top job at some point.
Breaking a long-standing norm of international economic diplomacy, Trump also urged the Fed to join his trade war with China, calling on it to “match” steps he said Beijing will take to offset the hardship caused by tariffs. He’s also said China and Europe are pushing their currencies lower and the Fed should do more. U.S. central bankers say they ignore political considerations and focus on their mandate for stable prices and maximum employment.
TURKEY
Turkish markets have been rattled repeatedly by President Erdogan’s forceful opinions on monetary policy, which culminated in the firing Saturday of Murat Cetinkaya, whose four-year term was due to end in 2020. Cetinkaya had overseen a pause in interest rates that lasted for more than nine months, despite high inflation. But Erdogan, who has called himself an “enemy of interest rates,” told lawmakers from his ruling party that politicians and bureaucrats all need to get behind his conviction that higher rates cause inflation. Deputy Governor Murat Uysal was named as a replacement, but the lira dropped.
U.K.
BOE Governor Mark Carney has long faced accusations of bias from pro-Brexit politicians, who say he is overly negative about Britain’s future outside the European Union. Lawmaker Jacob Rees-Mogg dubbed him the “high priest of project fear.” Carney denies the charge, but was assailed again last year after the BOE published scenarios showing that a no-deal Brexit could unleash a savage recession and a collapse in the pound.
EURO AREA
At the ECB, outgoing president Mario Draghi recently opened up about his concerns on attacks on independence. His own institution is relatively well safeguarded by an EU treaty that is hard to change, but he’s been lambasted in countries such as Germany and the Netherlands over the impact of his ultra-loose monetary policy on savers. He’s also been criticized in his home country, Italy: Deputy Premier Luigi Di Maio said he’s “poisoning the climate” by weighing into the debate about the nation’s budget. The appointment of Christine Lagarde as Draghi’s successor has also prompted criticism, given she was a former finance minister and not a trained economist, though her helming of the International Monetary Fund is viewed as a plus. But Annegret Kramp-Karrenbauer, who took over as CDU party chief from Angela Merkel last December, said last week that inflation is “well below” the ECB’s target. A spokesman later clarified her remarks to say she expects Lagarde to cautiously adjust policy as the ECB strives to achieve price stability so that it can move away from ultra-low interest rates.