The central 'enemy'

In the recently-held Jackson Hole symposium, the participating central bankers were concerned with proceedings elsewhere. Gauti Eggertson of Brown University narrated his experiences in a recent Bloomberg article. He noted that when Jerome Powell, chairman of the US Federal Reserve (Fed), was delivering his speech, other central bankers, instead of listening to him, were busy refreshing Twitter to see whether there was a new tweet from President Donald Trump, attacking Mr Powell or the Fed.

Mr Trump did not disappoint. Soon after Mr Powell’s speech, he tweeted that the Fed was not doing anything for the economy. He did not stop there and said: “...My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”

Yes, we are living in unusual times, but how does one reconcile with the idea of a US president openly calling the head of the Fed an enemy of the country? These things may happen in smaller economies with poor governance, but not in the world’s largest economy which boasts high governance and well-developed institutions. This so-called tweetstorm has become a new way for governments to express disappointment with central banks. It has happened in India as well. How can central banks address this matter?

In May this year, the central banks of Ukraine and Poland co-organised a conference. One of the panel discussions was on the following topic: “Central banks vs populists: ignore or fight”. It was moderated by Olga Stankova of the International Monetary Fund and the panel included Emma Murphy (Bank of England), Yuriy Gorodnichenko (University of California, Berkeley), Dmytro Sologub (National Bank of Ukraine), and Miroslav Singer (former governor, Czech National Bank).

Ms Stankova started with a fundamental question: What do we mean by populism? The dictionary defines it as “a type of politics that claims to represent the opinions and wishes of ordinary people ”, which is quite similar to how we understand democracy too. Then the question is: Why should populism be worrisome, because both central banks and the government are supposed to be serving the people? One way to think about this is that people felt betrayed after the 2008 financial crisis. This made them vote for politicians who were offering an alternative set of policies. However, these alternative or populist policies create their own set of problems, such as high and volatile inflation. This is hardly new as Prof. Gorodnichenko said that the fight between guardians of money (central banks) and governments had been there from time immemorial and we should always be prepared.  

Apart from macroeconomic troubles, populist leaders undermine institutions, such as the central bank, which undermines their autonomy. This is what we are seeing in the US. Mr Trump is seeking re-election and is blaming the central bank for keeping interest rates high. On the one hand, he says the US economy is doing very well (and takes credit) and, on the other hand, he seeks support from the Fed. Under such circumstances, how should central bankers respond? Mr Singer opined that central banks should build buffers in good times for crisis and have constant communication with politicians at all levels. He added that in tough times, central banks might be doing things that are not liked by people but have to be done. Ms Murphy and Mr Sologub, both serving their central banks, said in the case of such attacks, one should have a dialogue with the government and, hopefully, there are forums for addressing such issues.

Prof. Gorodnichenko cited an example of the German central bank, Deutsche Bundesbank, which had a tremendous reputation. To this, the moderator responded saying Bundesbank and its senior team fought hard with the government before gaining this reputation. This becomes like the chicken-egg question, what comes first, fight or reputation? Prof. Gorodnichenko later added that central banks had to create value for voters and earn their reputations. They could learn communications from politicians themselves, who speak in really simple language to people while explaining policies. The central banks also need to learn from the private sector, which advertises differently for different regions and people. Mr Singer had the final word, hinting that one had to be careful in communications because everyone had money and, thus, an opinion on the 

In all, dealing with the Trump tweetstorm poses a serious dilemma for Mr Powell. If he resigns, the president would nominate a more pliable chief who can ruin the US economy and people will blame him for not doing enough. If he sticks, he will have to face these constant tweetstorms. If the above panel is to be believed, the Fed has to invest seriously in communicating with the people. It has to constantly remind people about its goals and actions. In a way, the Fed has opened up seriously under its new programme “Fed Listens”, where the idea is not to just speak but listen to the people. These things take time, but Mr Trump does not have any, leading to another low in the history of the relations between the government and the central bank. Hopefully, Twitter officials are paying attention to how the medium is being used, of all people, by the US president.
The author teaches at Ahmedabad University

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