On Saturday, Donald Trump and his administration received a rebuke from one of the most influential names in central banking.
Speaking to reporters in Washington, Mario Draghi weighed in on the importance of central bank independence and he alluded to the US president in the process.
“Central banking independence is very important… because the whole credibility of monetary policy hinges on that”, Draghi said, adding that within their mandate, “central banks ought to be left free to choose what is the best way to comply with that mandate.” If not, “then they’re not accountable”, Draghi warned, adding that this has been “the central banking framework since the 80s everywhere.”
He continued, noting that “if a central bank is not independent, people may well think that monetary policy decisions follow political advice rather than objective assessment of the economic outlook”.
As far as the Fed is concerned, Draghi apparently did not see cause to shy away from what has become a highly sensitive subject in American political discourse. Here’s what he said:
I’m certainly worried about central bank independence in other countries, especially in the most important jurisdiction in the world.
Right. And for good reason. The US president has spent the better part of the last year engaged in an increasingly aggressive verbal campaign aimed at the Fed and in late 2018, Trump was widely reported to be on the verge of doing the unthinkable: Moving against his Fed chair and, potentially, his own Treasury Secretary, who the White House blames for Jerome Powell’s appointment.
Perhaps more disconcerting still is the not-so-subtle shift in Trump’s Fed rhetoric, which is now couched in terms of the central bank holding back the American economy and thereby prosperity. Larry Kudlow, Stephen Moore and, most recently, Mike Pence have perpetuated that notion by constructing the same straw man about the Fed being somehow anti-growth, and proceeding to attack that straw man viciously on cable television day after day.
The overall goal, of course, is to demonize the Fed in the eyes of Trump’s base, thereby clearing the way for monetary policy to be commandeered and remade in the MAGA image.
There is nothing hyperbolic about any of that – in February of 2018, we warned that it was just a matter of time before Trump began encroaching on central bank independence and those warnings (which contained myriad allusions to Turkish president Erdogan) were generally dismissed as overwrought at best and silly at worst.
Had we somehow been able to see the future and make a list of things Trump would subsequently say about the Fed and Powell and print that list in early 2018, readers would have doubtlessly accused us of resorting to the worst kind of bombast and fearmongering. Fast forward a year, and the kind of thing you see in the clip below is a daily occurrence:
Invariably, Draghi’s critics will charge that it’s supremely ironic for the ECB chief to wax hysteric about monetary policy being used for political purposes. After all, Draghi has been variously accused of leveraging the ECB’s asset purchase programs in the service of securing certain political outcomes and when Greece was on the brink during the summer of 2015, the central bank was the subject of weekly criticism in some circles for its handling of the situation. In 2018 and 2019, the likes of Matteo Salvini in Italy have assailed the ECB as being part of a conspiracy designed to – I don’t know – punish the Italians for their fiscal sins, I suppose (this is Salvini’s “lords of the spread” crusade – see here and here).
You could easily argue, however, that this is precisely the reason why you need an independent central bank – that is, to act as a check on irresponsible fiscal policies like those being pursued in Italy and the US. A kind of benign paternalism, if you will.
On Saturday, Draghi said he could not foresee a situation where the ECB succumbs to the same kind of pressure that the Fed now appears subject to. Draghi didn’t suggest that policy has actually been affected in the US – at least not yet.
There are also pressing questions about central bank independence in India (recall Urjit Patel’s abrupt resignation in December) and generally speaking, it looks as though the trend globally is towards more politicized central banks.
Of course there’s a fine line between “politicized” in the traditional sense and outright, flagrant commandeering of monetary policy, which is what Trump seems to be after. Hence Draghi’s consternation.