Forg­ing bonds cru­cial in a world where one up­ris­ing could end cher­ished in­de­pen­dence

Calgary Herald - - FINANCIAL POST - KEVIN CARMICHAEL Fi­nan­cial Post [email protected]­media.com Twit­ter.com/ CarmichaelKevin

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 lame­duck 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 Morneau­man­aged­top­utastopto 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 changedandU.S.stock­mar­kets 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 dif­fer- ence,” 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 ac­knowl­edg­ment that in the Age of Trump, le­git­i­macy must be earned, not as­sumed.

Am I happy with my choice? I’ll let you know in seven years.


Fed­eral Re­serve Board Chair Jerome Pow­ell has over­seen two in­ter­est-rate in­creases in the United States and gives every in­di­ca­tion that he is plan­ning more.

Stephen Poloz

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