Trump’s meddling with the Fed sets a dangerous precedent
Canada isn’t immune from politicizing its central bank, Kevin Carmichael writes.
The Washington Post published an interesting bit of trivia this week. As of Sept. 18, Donald Trump had tweeted or retweeted nasty things about the Federal Reserve and its chairman, Jerome Powell, an astonishing 43 times since the end of July.
The 43rd came about 25 minutes after Powell and the rest of the Fed’s policy committee voted to cut interest rates a quarter point, even though the unemployment rate is the lowest in five decades. “Jay Powell and the Federal Reserve Fail Again,” the president said in a message that had been retweeted 15,000 times and liked by some 57,000 Twitter users. “No ‘guts,’ no sense, no vision! A terrible communicator!”
To put Trump’s abuse into perspective, he commented on the central bank 43 more times in a six-week stretch than his two immediate predecessors did in the entire 16 years they occupied the White House.
Rookie executives make mistakes. After the Bank of Canada raised interest rates in July
2017, unnamed “officials” from Team Trudeau, which still was new at running a Group of Seven economy, told a Bloomberg News reporter that the government was worried that governor Stephen Poloz had made a mistake. There have been no reports of that nature since, suggesting those officials were told to shut up, less they undermine the public’s belief that the central bank is indifferent to the election calendar.
No one has been able to silence Trump, and it’s getting harder to shrug off his Fed bashing as mere entertainment.
Robert Shiller, the Nobel economist, said this week that the president must be having “some sort of psychological effect” on central bankers. Powell insists he is unmoved by political pressure. Most believe him, but not everyone does. “I wonder at what point this rising degree of political pressure/interference will weigh on markets,” Phil Suttle, a former Bank of England and New York Fed economist who now runs his own consultancy, said earlier this month after Trump declared that interest rates should be zero, or even negative. “Countries that do this type of interference generally are not rated AAA.”
Based on the election campaign so far, you might think the biggest thing the next finance minister will do in her or his first year will be to make life cheaper for the lucky members of some strategic vote banks. Small beer, actually. The main event will be choosing a new central bank governor. Stephen Poloz’s seven-year tenure ends in June, so Bill Morneau, or whoever replaces Morneau, will have a rare opportunity to directly influence monetary policy by installing the only person who has the statutory power to raise and lower interest rates. The governor is traditionally chosen by a translucent hiring process that obscures the extent to which politics can interfere. The next government should protect the Bank of Canada’s independence by choosing Poloz’s successor in the daylight rather than the shadows.
The trouble with Trump’s presidency is he provides cover for other leaders who would be tempted by their worst instincts.
Turkish President Recep Tayyip Erdogan, who adopted the novel view that his country’s inflation problem was the result of high interest rates, sacked his central bank chief in July for refusing to abandon economic orthodoxy.
In India, Prime Minister Narendra Modi is on his third central bank governor, as the first two proved to be too protective of the Reserve Bank of India’s independence.
Canada is nothing like Turkey or India. But it has a lot in common with the United Kingdom, where members of the governing Conservative party have turned Bank of England governor Mark Carney into an enemy of the people because he was forthright and said the central bank’s forecasts showed Brexit could cause a recession.
Some might find it hard to imagine Canada’s genteel political class would see fit to use of the Bank of Canada governor as pawn or punching bag. Alas, the previous government already has opened the door.
Technically, it’s the central bank’s board of directors that chooses the governor, although the cabinet must approve the choice. However, Jim Flaherty, the finance minister who selected Poloz, issued a press release to announce that he would be interviewing the shortlist, and Stephen Harper, the prime minister, summoned the new central bank governor to his office for a photo-op. There was no purpose to any of this publicity other than to remind everyone of who was in charge. So the contemporary precedent for politicizing the Bank of Canada has been set, and Trump has shown any Canadian politician so inclined that they needn’t be so subtle when they belittle the central bank governor for partisan gain.
There are ways to guard against further erosion.
In 2016, the Trudeau government introduced a new process for selecting Supreme Court justices that could serve as a guide for choosing the central bank’s leaders. The Bank of Canada isn’t a fourth branch of government, but it’s close enough to one that the governor, and even the deputies, should face parliamentary scrutiny so their appointments could be rescinded if they were found wanting. Central bankers may loathe the idea of more interviews, but a layer of public accountability would protect them from overzealous prime ministers and finance ministers.
For such a process to work, members of Parliament would have to see their jobs as bigger than repeating questions given them by the Prime Minister’s Office or using every opportunity to embarrass their political opponents. I’ve observed the House finance committee for most of the past two decades and it has all but crushed my faith in Canadian parliamentary democracy. The committees I’ve observed would have been incapable of providing true accountability.
But who knows what might happen if backbenchers were given a chance to be parliamentarians instead of partisan hacks. The next group should demand it, especially since most who win seats in this election will have done so despite their leaders, not because of them.
Financial Post kcarmichael@postmedia.com Twitter.com/CarmichaelKevin