Because Trump has now understood that he does not have the authority to dismiss Powell, he tries to put pressure on Powell in other ways. For example, by indicating that he is already busy with the decision who follows Powell if his term ends in May. A premature announcement of the successor means a lot of attention for this person. That could undermine Powell’s authority.
Financial markets are not happy with politicians who interfere with monetary policy. After all, the past is often wrong. In the worst case, they instruct the bank president to open the money tap to pay their bills. Inflation of hundreds, sometimes thousands of percent, is often the result, as in the 1920s in Germany and this century in Argentina, Zimbabwe and Syria.
Economy and job growth
In less extreme cases of political interference with monetary policy, politicians are ‘only’ out of a lower policy interest because that can cause lower market interest rates. That stimulates the economy and job growth. At lower market rates, the refinancing of the national debt becomes cheaper, an important reason for Trump to argue for lower interest rates.
But the risk is that politicians in their eagerness to drag the aforementioned benefits of a lower interest rate, allowing the interest to determine so low that the inflation goal can no longer be achieved. “If the lower interest rate leads to too much inflation, you will simply increase interest rates by that time,” Trump said at the press conference.
High inflation
He apparently does not realize that this is not that easy, because it takes about twelve to eighteen months for changes to the interests in economic activity. In the meantime you have an unwanted high inflation. Something that will not make his voters happy and the market tribes will rise.
Yet it is not correct if politicians should not have an influence on monetary policy at all. After all, the interest rate policy is an important instrument in economic politics and therefore – like other economic policy – should not escape democratic control. It is therefore logical if democratically chosen governments and/or parliaments have influence on the choice of the level of inflation that is found acceptable.
Democracy
If the choice for an inflation goal is made by politicians once in a previous time, such as in England and Norway, it fits with a democracy. But for the years in between, the Centralbank drivers must be entirely free to determine which policy interest is needed to achieve that inflation goal.
Of course, it remains everyone’s right to find that the interest is too high or too low, but politicians do well not to make a misunderstanding about it that only the central bank drivers decide on the interest. If they have doubts about this, they risk that they increase inflation expectations in the financial markets. That leads to higher rather than lower market trials! Exactly what we saw this year after Trump started his attack on Powell. A shot in your own foot!
Raoul Leering is a macro economist and columnist. Read earlier columns here: