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Central banks: The next stop on populism’s march

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If it’s true that there are turning points in history, then Michael Gove’s declaration in June 2016 that “the people in this country have had enough of experts” is a pretty good candidate. Nine months on, the question of whether we are experiencing a twenty-first century revival of populist politics would appear to have been settled. Much less settled, and rather more pressing, is the question of what happens next when the levers of government policy are taken out of the hands of ‘the experts’ and given instead to those whose primary qualifications seem to be a lack of squeamishness in public discourse.

Unfortunately for the new US President, and for aspiring demagogues everywhere, the business of running a government is rather more complicated than campaigning to do so. Eight weeks on from his inauguration there is already ample evidence for this, from a botched first attempt to implement a travel ban to an inability to prevent key members of his administration from speaking to Russian government officials and then lying about it afterwards. And yet immigration policy and diplomacy are among the less specialist areas that the President’s team will need to deal with. The more technical issues of monetary and fiscal policy have for the past few decades been the preserve of those who have spent their lives studying them. If the rancorous statements made by Trump on the campaign trail regarding Janet Yellen’s management of the Federal Reserve are anything to go by, this may be about to change.

The unease that has crept into the relationship between politicians and their central banks in recent years is not new – not for nothing is an accusation of ‘fed-bashing’ such a well-worn journalistic cliché. Perhaps the real surprise is that the degree of independence currently enjoyed by the western world’s unelected central bank officials was allowed to begin with. In the US, this independence has not even been formalised, having arisen as a result of the relatively friendly relationships enjoyed by Alan Greenspan and the Clinton and Bush administrations. For now at least, Trump chooses only to tweet disparaging remarks about Yellen’s competence in her role as Chair. We have not yet returned to the days where President Truman summoned the whole FOMC to the White House to be publicly admonished.

That said, Trump has an unusually significant opportunity to remould the Federal Reserve in his own image. Over the course of his presidency – assuming he sees out his full term, an eventuality to which high street bookmakers are admittedly only assigning a 50% probability – he will be able to appoint six or seven of the FOMC’s 12 members. This includes both the Chair and Vice Chair of the Federal Reserve (whose terms expire in February and June 2018 respectively) as well as the post of Chair on the Committee of Supervision and Regulation, soon to be vacated as a result of Daniel Tarullo’s recent resignation. It is true that the appointment of David Nason, current frontrunner for the latter position and former Deputy Treasury Secretary under Hank Paulson, would hardly be a move towards ‘draining the swamp’. But the President’s willingness to perform extremely public U-turns cannot be discounted. Should he start to undershoot the stratospherically high expectations vested in him by both the markets and his core voters, the inevitable backlash could easily lead to considerably less staid appointments.

The list of alternative contenders for Tarullo’s post gives an indication of how a Trumptopian Federal Reserve might look. First runner up appears to be John Allison, a libertarian who admires the gold standard and questions whether the Fed should be setting interest rates at all. It is not clear what would replace the FOMC, although one option would be for the White House to determine the Federal Funds target range itself and make use of the President’s fondness for disseminating policy announcements using 140 characters or fewer. Perhaps a more plausible suggestion comes from the work of another candidate, the Republican-friendly macroeconomist John Taylor. Taylor is an advocate of rules-based monetary policy, whereby an algorithm rather than a committee sets interest rates. Removing the unpredictable discretionary element from monetary policy has obvious attractions – although many might be less pleased that the ‘Taylor rule’ would prescribe an immediate rate hike to somewhere between 3.5 and 4.0 percent.

Over the past six weeks, the members of the FOMC have treated observers to a masterclass in how a few well-chosen remarks by those in charge can gently guide the markets to change their expectations without bolting for the exit.

The implied probability for yesterday’s rate hike rose from 32% in early February to nearly 100% in the week prior to the meeting, and the equity markets barely batted an eyelid and instead, continued a record-breaking winning streak. In all likelihood, Yellen and those like her ilk will have their hands at the tiller for some time to come. Nevertheless, the days when those awaiting news of US monetary policy are obliged to monitor a late night Twitter feed may be closer than one would think.

All views expressed here are the author’s own and are based on information available at the time of writing.



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