There can be no doubt that US President Donald Trump wants lower interest rates, irrespective of any possible negative consequences. This stance pitches him against Jerome Powell, as the chair of the board of governors of the Federal Reserve, and other board members who are hesitant to lower interest rates. Reasons for their hesitation include fears that the inflation rate might accelerate when interest rates drop.
This stand-off between Trump and Powell is not unique. Politicians often look for a “quick fix” in the form of economic stimulus through lower interest rates. Central bankers, on the other hand, are concerned about the long-term impact of interest rate decisions on inflation.
It has been said that central bankers are obsessed with inflation. This is to be expected. The public should be wary if central bankers are not obsessed with inflation and become popular with politicians.
Politicians are obsessed with popularity. Their long-term planning ends with the next election. As higher inflation follows with a lag after inappropriate monetary policy, it might well be a problem for the next administration. Therefore, it is something for a successor to worry about and deal with.
Trump developed a dislike of the current monetary policy stance of the Fed and therefore also of Powell. However, Powell is one person Trump cannot summarily fire.
This security of tenure of individuals holding senior positions at central banks is by design, not default. It helps to ensure the autonomy and independence of the central bank and protect the institution from undue political interference.
Trump’s criticism of Powell confirms the point that central banks should have autonomy and independence — and protection from the whims of politicians. The alternative would be a repeat of the 1970s in Europe and the US and South Africa in the 1980s. During those respective periods, central banks’ autonomy and independence were in jeopardy, and international and domestic inflation rates reached record levels.
Powell is one person Trump cannot summarily fire
In the case of Powell, the cost of refurbishing buildings by the Fed has emerged as a major issue. This is the basis for a possible investigation into his conduct as Fed chair. Admittedly, the cost of the refurbishment might be as high as $2.5bn, which is a lot of money.
Trump using the cost of the refurbishment as a possible avenue to get rid of Powell reminds me of events in Canada in 1961.
James Coyne was appointed governor of the Bank of Canada on January 1 1955, after serving as deputy governor from 1950. As an aside, Coyne is an apt surname for a central bank governor.
Coyne expressed opposition to the expansionary fiscal policy conduct of prime minister John Diefenbaker and finance minister Donald Fleming, funded by means of borrowing. The government followed this strategy in an effort to stimulate economic growth in a weakening economy.
At the same time, Coyne resisted the government’s pressure to lower interest rates to stimulate the economy. The government held the view that it was elected and should therefore be entrusted with the function of determining monetary policy, rather than entrusting it to the central bank.
In terms of the prevailing legislation, Coyne had security of tenure for the period of his appointment, and neither Diefenbaker nor Fleming could fire him. Neither could the government.
When Coyne changed the pension provisions for the central bank governor, improving his own financial position for retirement, Fleming saw an opportunity to act against him. On June 20 1961, he introduced a bill in parliament to declare vacant the position of the central bank governor. The House of Commons passed the bill, but after testimony by Coyne, the Senate defeated it.
Only after the defeat of the bill did Coyne resign. He left after allowing public debate on the position of the governor and won the battle. His strong stance helped to confirm the autonomy and independence of the Canadian central bank in subsequent years.
What became known as the Coyne Affair or the Coyne Crisis highlights two issues. First, tension between politicians and central bankers is nothing new. They have different agendas and objectives.
Second, there are good reasons for central bank autonomy and independence. The alternative is government control over monetary policy and interest rates, with little regard for the danger of higher future inflation owing to current action.
In Trump vs Powell, the question is whether Powell will blink. Will this stand-off one day be named after Trump or Powell?
Rossouw is an honorary professor at Wits Business School and economist at Altitude Wealth
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