Solidarity in the face of Trumped-up charges
Fed Chair Powell’s principled resistance to the ‘pretext’ DOJ investigation should be no surprise considering his legacy and the values ingrained into monetary policymakers. The public support from other central bank heads shows the role of the BIS-hosted forums and other meetings in building solidarity between them.
- The US Department of Justice’s investigation into and possible criminal charges against Fed Chair Jerome Powell is a whole new level of attempted government coercion of the Fed on monetary policy. Given how ingrained the value of independence is for central bankers, Powell’s strongly worded response is both warranted and unsurprising. We expect him to stay in his post until at least the end of his term as chair in May.
- The extraordinary DOJ action has spurred equally extraordinary, yet also unsurprising, support from other central banks and eminent economists. The relationships built over many meetings in Basel and elsewhere would have been a factor in creating the kind of solidarity that made the central bank statement possible.
- Powell’s response and broad-based support suggest there is a limit to Trump’s ability to coerce the central bank. But with the late January FOMC meeting expected to leave the Fed funds rate unchanged and the next Fed Chair still not announced, the next few weeks could provide to be quite eventful in central banking world.
Over the weekend, the US Federal Reserve received subpoenas related to possible criminal charges against Fed Chair Jerome Powell. Note, no charges have been laid just yet. In response, Powell released a strongly worded video statement, labelling the investigation a ‘pretext’. We think this characterisation is completely warranted, given the administration’s previous actions. The investigation is just the latest attempt to bully the Fed into conducting monetary policy according to President Trump’s wishes, to lower interest rates significantly and boost US demand even as inflation remains above target.
Like Governor Cook before him, we expect Chair Powell to stay in his post until at least the end of his term as chair in May. Although his term on the Board of Governors extends beyond that, typically former Chairs do not remain on the Board once they are no longer Chair. If Powell were to step down from the Board when his term as Chair ends, we would not take that as a signal that the Trump Administration’s pressure tactics were working.
Powell’s resistance should be no surprise to observers of monetary policymaking. Central bankers truly believe – with much justification – that having ‘instrument independence’ (operational independence) is essential for good policy. That is, it is appropriate for government or Parliament to decide what the central bank’s policy should try to achieve, but it should be up to the central bank to work out how to achieve it. This is the distinction between ‘goal independence’ and ‘instrument independence’ first made in the early 1990s in a seminal paper by the eminent academic and central banker, the late Stanley Fischer and his coauthor Guy Debelle. As is well known, Debelle went on to become Deputy Governor of the RBA, and gave his later perspective on central bank independence in a 2017 speech.
Central bankers also know what happens if operational independence is absent. Not only can they point to the example of the 1970s, but also to the more recent experiences of Argentina and Türkiye. Powell would not want his legacy to be the Fed Chair that folded in the face of political bullying.
Powell’s response shows that Fed officials regard the administration as having crossed a line. Politicians will always express views about what they would like central banks to do with monetary policy. And that is their prerogative, no need to be outraged by it. What the current US administration is doing, though, is on a whole other level. Nor is it just about central banks being somehow special. The same principle of operational independence applies to national statistical agencies, though they do not tend to host whole academic conferences to talk about it. The earlier sacking of the head of the Bureau of Labour Statistics needs to be seen as part of the context for Powell’s reaction.
In another extraordinary turn, late in the evening of 13 January Australian time, a group of central bank governors and the Bank for International Settlements (BIS) released a short statement of solidarity with Chair Powell, emphasising the need for central banks to have operational independence. A separate similar statement was released by eminent US economists, including the three previous Fed Chairs. The central banks’ statement was released on multiple web sites (see RBA version here) and very likely organised by the BIS and the European Central Bank (ECB); ECB President Lagarde has previously commented publicly in support of the Fed in forthright terms.
RBA Governor Michele Bullock was among the signatories, along with the heads of the ECB, Bank of England and the central banks of Sweden, Denmark, Switzerland, Norway, Canada, South Korea, Brazil, South Africa and New Zealand. The ECB and RBA versions of the statement both note that other names might be added to the list later; indeed, it seems that the RBNZ was added in a subsequent iteration. The absence of some key countries – including Japan, Mexico and a few other G20 members – is probably not a signal of anything other than a desire to move quickly on the initial statement. Some central bank governors would have wanted to consult with the other members of their board or needed to translate the statement before publishing on their own websites.
The central bank statement should also not be surprising. The need for operational independence of monetary policy is widely viewed as bedrock for central banks more generally, not just the Fed. We should also not underestimate the role of the substantial calendar of meetings of central bankers in building solidarity between them. In this, the role of the BIS is key. It hosts meetings for central bank heads every two months – a significant call on the time of its more far-flung members in the Asian time zone, but a commitment they value and take seriously. On top of this, there are IMF meetings and regional forums where the principal players also interact. These Governors know each other well, so it is no surprise they were willing to support one of their own. It also may have given Powell some moral support to push back in the way he did. Consider also that if he had instead folded under the administration’s pressure, he would have had to face his peers at a couple more meetings in Basel before May.
(Full disclosure: I worked for the BIS in Basel for nearly two years over 2007–08, attended countless meetings there and still jump at the opportunity to attend their annual meeting of private sector chief economists.)
Where to from here? This week’s events suggest that there is a limit to Trump’s ability to coerce the central bank. But this turn of events poisons the well for Powell’s successor – an appointment that is yet to be announced. Who would agree to take a position in government service in the US knowing that you might be subjected to trumped-up criminal investigations?
The next few days and weeks could prove to be quite eventful in the central banking world. A decision to hold rates steady at the next FOMC meeting in late January, as is widely expected, could spark a new round of friction. Look also for potential future Fed Chairs to indicate their support for the principle of operational independence, as Kevin Hassett is reported to have already done.
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