The Fed’s independence is under siege
In trying to remain apolitical, Chairman Powell has become political.
It’s not quite a tale of two cities but it is a tale of two sides of one city. And that city, not that anybody should be too surprised is Washington DC, on one side of which is the White House and on the other of which is the headquarters of the Federal Reserve System.
It is just over a mile from the Marriner S Eccles Building on Constitution Avenue to 1600 Pennsylvania Avenue but, for all intents and purposes, they could be a world apart. Yesterday, Tuesday, Fed Chairman Jay Powell began the first of his two days of his semi-annual testimony to Congress, formerly known as the Humphrey Hawkins testimony, in which he lays out to members of both houses where the Fed stands and where it thinks it should be going.
President Trump already put the cat amongst the pigeons when he declared on 23 January and ahead of the last monetary policy meeting of the FOMC: “I think I know interest rates much better than they do, and I think I know it certainly much better than the one who's primarily in charge of making that decision." Thank you Mr Trump, for if you hadn’t told me I would never have guessed. Jay Powell quietly let that go and has since adopted his own version of his predecessor Alan Greenspan’s legendary sphynx face. The mutual antipathy between Trump and Powell broke surface when, during the election campaign, Trump inferred that one of his first acts would be to fire Powell and Powell responded by quietly pointing out that that was not within even the President’s power.
The media yesterday leapt on Chairman Powell’s simple statement that the current growth trajectory of the economy did for the moment at least not justify any further rate cuts. In his own words, the Fed is “not in a hurry” to reduce the cost of borrowing that currently lies in a range of 4.25% to 4.50%. He added to that that the labour market was showing no inflationary tendencies and that there was no pressure from that side either. But that was all to be expected.
There was, however, a level of belligerence in Powell’s demeanour that was, from my perspective at least, of far more interest. Thus he stated, “We’ll make better policy, we’ll keep inflation lower, if we just focus on doing our job and stay out of politics, stay out of elections, and don’t try to favour or hurt any political party, or any political filter and just try to focus on the data”. He went on: “If we start putting up political filters, we’ll be less effective at our already quite difficult job.” There’s mud in your eye, Mr President.
He did not let off and pointed out that if the President were to try to fire any one of the seven members of the Fed’s board of governors, he’d be breaking the law.
It is remarkably sad but also a sign of the prevailing mood in Washington that the Democrats are also sniping at the Fed as they regard the discussion as to whether the banks’ periodic stress tests should be reviewed as a sign the central bank is bowing to political pressure.
With all due respect, the introduction of the stress tests was in response to the banking crisis and in many ways a sop to the taxpayers who had, also with due respect, paid to bail out the foundering banking system. The actual value of the stress tests is questionable as they were and are another typical case of generals preparing to fight the last war. This is not the time or place to bring up the GFC, its causes and effects, and although there is a stack of books on the subject I fear none of them – there are many I have of course never read – ever really go to the heart of the matter. Sure, there were hordes of greedy bankers bestriding Wall Street, but they were doing nothing other than intermediating between equally greedy lenders, greedy borrowers and not let us forget the greedy politicians who just loved the tsunami of taxes that were coming from the banks and were steaming into treasury coffers. The Global Financial Crisis was brought on by the collapse of the entire value chain although when the brown stuff hit the propellor “in size” it stuck to the “bankers” with at the time no notable distinction between the multi-millionaire Masters of the Universe in investment banking on Wall Street and some poor teller doing his or her job on Main Street.
I have repeatedly been urged to write my own story of the heady years between 2000 and 2008. I’m not sure anybody really cares anymore – there’s nothing of less value than yesterday’s newspaper – especially as trying to spread the blame evenly across the whole of society would always have been a bit too risky. I did, however, get as far as choosing a working title for the book which was “Fifty Shades of Pinstripes”.
Donald Trump probably knows not much more about setting monetary policy than our Chihuahua – may I please introduce you to little Hansi – knows about driving a car. Scratch the surface and you find in Donald Trump an over-leveraged property developer who has honed his skill at staying one step ahead of his creditors, an art generic to his breed, but who at the same time has perfected the act of looking and behaving as though he can defy gravity and walk on water.
If my memory serves me, it was Kim Jong Il, dictator father of North Korea’s current dictator son Kim Jong Un who said that he had only played golf once, had played to par but had found the whole experience boring after which he never again lifted a club. I shall leave it at that.
The Fed’s independence is under siege. Please don’t get me wrong, the Fed has, as have all other central banks, in the past made mistakes and without a doubt will do so in the future. It too was part of the value chain involved in inflating the asset price bubble ahead of the GFC, but it became so by leaving rates too low for too long. Many years ago, I noted that the difference between the Fed and the Bundesbank, Germany’s towering central bank in pre-single currency Europe, was that the Fed would always set the lowest rates it felt it could justify as opposed to the BuBa that set the highest.
It is not without reason that the German representatives on the central council of the ECB have consistently militated against overly loose monetary policy which in turn led to Jens Weidemann being passed over in favour of the highly political Christine Lagarde as replacement for Mario Draghi as president of the ECB. Either way, I think I can assure you that whatever the Fed Funds target rate is, it is the lowest that Powell and the gang believe to be expedient.
He did of course refer to the inflation target of 2% although that yesterday looked more like window dressing. In recent speeches, he has assiduously avoided reference to that rather random number but at least it gave him aircover when explaining why he saw no cause for imminent rate cuts.
In trying to remain apolitical, Powell became political as he told the panel: “It really does remain to be seen what tariff policies would be implemented. It would be unwise to speculate when we really don’t know. We see proposals, but it’s so hard to say what will happen”. He continued: “It’s really not just tariffs. It’s tariffs, immigration, fiscal policy and regulatory policy. We’ll try to make sense of it and do what’s right for monetary policy.”
Yes, the Fed is shooting at the same moving target as the rest of us and, although the proposed tariff regime will with near certainty have an inflationary effect on the economy, nobody, the Fed included, has much of a clue what it will be. Jay Powell has clearly taken a lesson from Theodore Roosevelt: “Speak softly and carry a big stick”.