Central banks courting public

A smart move in the era of populism

We may finally be able to stop caring what Donald Trump says about anything. The president’s former lawyer pleaded guilty to paying two women to keep quiet about alleged affairs with Trump, and his former campaign director also is going to jail. It’s fair to speculate that Trump is now in the lame-duck phase of his presidency, as it seems likely that he will be spending a great deal of time protecting himself from charges of guilt by association.

But you never know in Trumpland. So let’s go back to the start of this extraordinary week and consider the U.S. president’s attempts to influence monetary policy. Central banks everywhere were reminded that they are only one populist uprising away from losing the operational independence they so cherish, explaining why so many of them, including the Bank of Canada, are working harder to establish a bond with the public.

The Wall Street Journal reported on Aug. 20 that Trump was telling donors at a fundraiser in the Hamptons that he was displeased with Jerome Powell, the chairman of the Federal Reserve. The president complained privately that he thought he was getting a fan of “cheap money” when he chose Powell over Janet Yellen, the incumbent. Instead, Trump’s man already has overseen two interest-rate increases and gives every indication that he is planning more.

Whisper campaigns like the one Trump started in the Hamptons are unhelpful. They sow doubt about whether interest rates are set in the best interest of the public or of the political leader who happens to control appointments. The Bank of Canada had to deal with one last summer, when a number of Prime Minister Justin Trudeau’s “officials” shared their misgivings about Governor Stephen Poloz’s pivot to higher interest rates with a Bloomberg News reporter.

Finance Minister Bill Morneau managed to put a stop to such loose talk fairly quickly. Morneau’s U.S. counterpart, Steven Mnuchin, also has said that the Trump administration respects the Fed’s independence. That might be true at the Treasury, but not in the Oval Office. Hours after the Journal story was published, Trump put his opinions of Powell on the record.

“I’m not thrilled with this raising of interest rates, no. I’m not thrilled,” he told the Reuters news agency.

For decades, it’s been understood that it’s best for everyone if central banks are left alone to do their thing. But Trump appears to think the Fed should be working for him; he told Reuters that U.S. monetary policy is undercutting his attempts to bully other countries into rewriting trade rules. Higher interest rates contribute to a stronger dollar, thus making U.S. exports more expensive and offsetting the impact of Trump’s tariffs.

“We’re negotiating very powerfully and strongly with other nations. We’re going to win. But during this period of time I should be given some help by the Fed. The other countries are accommodated,” the president said.

To be sure, those of us who spend an inordinate amount of time thinking about central banking tend to get more upset about this sort thing than normal people. Ben White, the editor of Politico’s Morning Money newsletter, advised his readers to disregard Trump’s latest violation of a norm. Powell has said publicly that he won’t be swayed by the White House. Investors mostly ignored the reports. The dollar was little changed and U.S. stock markets continued their steady march higher.

“Trump won’t be able to get rid of Powell and these kinds of occasional pot shots aren’t going to make any significant difference,” White wrote on Aug. 21.

Maybe not. But Trump’s comments undermine the Fed’s efforts to strengthen its standing with the broader public. The central bank probably saved the U.S. from an economic depression a decade ago, but a significant number of Americans think the Fed’s only concern was sheltering rich bankers. There is a drumbeat of calls on Capitol Hill to curb the Fed’s powers that refuses to go away. Trump already had diminished some of the central bank’s mystique by turning the process that resulted in Powell’s hiring into something that resembled a season of the Apprentice.

“Am I happy with my choice?” Trump said in his interview with Reuters. “I’ll let you know in seven years.” (A Fed chair’s term lasts four years.)

Back here on Earth, even Vladimir Putin, the autocratic president of Russia, understands why politicians should leave their central banks alone. Argentina, Turkey and Russia are three big emerging markets that are suffering from weak economic growth and extreme debt burdens. Two of them — Argentina and Turkey — are fighting currency crises and capital flight. Russia, which must cope with the added burden of international sanctions, is surprisingly stable. Of the three countries, only Russia’s central bank is widely perceived by international investors to operate with a free hand. That makes policy predictable, which is often enough to keep markets from crashing.

It’s hard to imagine Trudeau sharing his thoughts about Poloz’s performance, but as that Bloomberg story of a year ago shows, the Bank of Canada can hardly take its independence for granted.

That’s why it is good that Poloz is trying so hard to enhance the institution’s credibility by making sure the public understands completely what he’s trying to do. Last year, Sharon Kozicki and Jill Vardy, two of Poloz’s advisers, published a paper on how the central bank makes its decisions amid times of heightened uncertainty. In June, Poloz devoted an entire speech to communication, promising to make the central bank’s messages understandable to everyone, not just bond traders.

Poloz’s remarks that day were mostly ignored. They shouldn’t have been. The speech was an acknowledgement that in the Age of Trump, legitimacy must be earned, not assumed.