Get used to it.
That’s the message from PIMCO’s Joachim Fels when it comes to the erosion of independent monetary policymaking.
“The heyday of central bank independence now lies behind us”, he wrote, in a note to clients. Fels’s fatalistic outlook is set against a backdrop of daily attacks on the Fed and a high-profile move against (former) Turkish central bank chief Murat Cetinkaya.
When Turkey’s Erdogan ousted Cetinkaya on Saturday, it wasn’t exactly a surprise. Erdogan is, after all, a man who encroaches on monetary policy at every turn and his “unorthodox” (to put it mildly) views on rates and inflation are legendary. But the nexus between Erdogan’s ongoing efforts to commandeer CBT and Donald Trump’s incessant berating of the Fed can’t be ignored.
Last year, at a NATO gathering in Brussels, an irritated Trump lamented that when he pressed allies to spend more on defense, “Many of them said, ‘Well, we have to ask our parliaments. We have a process; we can’t just tell you we’re going to spend more, we have a legal process.'” Trump then turned to Erdogan. “Except for Erdogan over here. He does things the right way”, Trump said. Then he fist-bumped the Turkish autocrat.
When it comes to monetary policy, “the right way” for autocrats is almost always an accommodative bent. That’s conducive to deliberately overheating the domestic economy, which, unless inflation runs out of control, plays well with voters. In many cases, autocrats will throw caution to the wind, lining up fiscal stimulus and rate cuts, a potentially combustible pro-cyclical brew. Independent central banks are averse to this to the extent it risks running the economy “too” hot, but for politicians (and especially overbearing politicians) there is no such thing as “too” hot.
In an era where strongmen and populism are ascendant, you can expect central banks to become increasingly beholden. “Like it or not, get used to the new normal of dependent central banks, perpetually low interest rates and quantitative easing”, PIMCO’s Fels wrote, in the same note.
It is now impossible to catalogue all of the times Trump has taken aim at the Powell Fed. So obsessed with Fed policy is Trump, that the president was tweeting about the central bank a half hour before midnight on Friday. “Our most difficult problem is not our competitors, it is the Federal Reserve!”, he shrieked.
When it comes to rate cuts and QE, no country can afford to be an island – especially in the developed world. All else equal, easier monetary policy can lead to currency weakness and, on the flipside, a loss of export competitiveness for other countries, which must then “match” (to employ Trump’s childlike vernacular).
PIMCO’s Fels argues that while the natural reaction to this in the US would be a weaker dollar and a selloff at the long-end (on inflation worries), the expectation of central bank bond buying in perpetuity will likely keep the curve from bear steepening explosively, while easing by other central banks may keep dollar weakness in check.
Whether or not central banks can avoid losing control of the long-end in an environment of never-ending easing depends to a large extent on whether politicians aggressively deploy fiscal stimulus alongside expansionary monetary policy. Fels thinks they may not. I’m not so sure. What rate of growth would be “enough” for a Trump or for an Erdogan? Or, if you want to look at it from the other end of the spectrum in the US, at what point would a progressive president be “satisfied” that the government has spent enough to decrease inequality and provide employment and financial benefits for everyone?
The answer to those questions is obviously “no amount” and “never”. That means the temptation will always be there to roll out more and more fiscal stimulus, especially when you know the central bank will buy any associated debt issuance.
Fels also reiterated what is by now a familiar refrain: Publicly pressuring the Fed puts Powell in a no-win situation. If the Fed cuts rates to support the expansion at a time of rampant uncertainty, he opens the institution up to charges of political bias. If the Fed doesn’t cut rates in an effort to assert its independence, monetary policy isn’t being allowed to operate in a way that’s conducive to sustaining economic momentum, precisely the opposite of what Trump intends to accomplish with his attacks. Former vice chair Stanley Fischer recently suggested that the December hike might not have happened were it not for Trump’s badgering.
It’s also worth noting that the rise of authoritarianism and populism in Europe could end up forcing the ECB to deliberately politicize itself in order to keep the monetary union together. For instance, Christine Lagarde is set to take the reins from Draghi. The fact that she’s more politician than economist is probably not an accident. The political landscape in Europe is more fraught than ever. Although the worst-case outcome (defined here as a populist/euroskeptic wave) was averted in the EU elections, League’s performance in Italy and Rassemblement National’s showing in France underscored the lingering appeal of nationalism and suggested centrists have failed to stem the populist tide that swept across the bloc in 2015 during the migrant crisis. In Lagarde, the ECB will get a seasoned political operator and something of a consensus builder. That may prove especially useful going forward in the event the eurozone economy careens into a downturn, raising the stakes in contentious relationships between, for instance, Rome and Brussels.
All of this was, of course, entirely predictable. Some readers scoffed at my insistence, in February of 2018, that Trump would end up acting and sounding just like Erdogan if the Fed persisted in hiking rates after Powell took over.
With that in mind, I’ll leave you to once again ponder the following classic passages from what can now fairly be described as a laughably prescient Dealbreaker article published just after Yellen passed the torch to Trump’s Fed pick:
I don’t think everyone fully appreciates how soon-to-be precarious this is going to get for Powell. Just imagine for a second that Trump’s myopic tax cuts and stimulus end up getting him the economic sugar high he’s after and just as he’s shrieking about it at a rally, the Fed hikes rates citing an overheating economy. Trump would go crazy. He would never let that stand. He’s going to turn into Erdogan when it comes to rates.
Read the following quotes from a speech Erdogan made back in November  when inflation was spiraling out of control in Turkey and the lira was plunging:
They say central banks are independent so we shouldn’t interfere. This is the end result because we haven’t interfered. We will solve this, things can’t go on like this.
Who does that sound like? I mean besides Erdogan.
If you read the accompanying color from Bloomberg it’s even easier to imagine Trump going this route if Powell gets too aggressive. To wit:
Erdogan [is] vowing to step up a fight against what he calls the “interest rate lobby,” an alleged cabal of financiers and lobbyists that he says is conspiring to keep Turkey’s interest rates artificially high.
It’s almost too perfect a parallel. Before you know it, “the swamp” and the “American deep state” will include the Fed governors.
Anyway, don’t say I didn’t warn you. But also, don’t forget to laugh when it starts because the silver lining will be that the tweets and the anti-Fed campaign rallies will be nothing short of hysterical.