Trump Shouldn’t Bully the Fed

Yellen doesn't work for Trump.

Photographer: AFP/Getty Images

U.S. President-elect Donald Trump repeatedly criticized Federal Reserve Chair Janet Yellen during his campaign. British Prime Minister Theresa May has questioned the Bank of England’s recent actions, for a while putting Governor Mark Carney’s tenure in doubt. The long-cherished principle of central-bank independence seems to be under attack.

That principle is worth defending -- Trump, for one, went too far. At the same time, central banks can’t expect to be above criticism or beyond politics.

The standard case for leaving central banks alone to conduct monetary policy rests on three points. First, a government that controls the central bank might be tempted to finance unaffordable budget deficits by printing money. (See Zimbabwe.) Second, to provide economic stability, a steady hand on the monetary controls is required, which demands some insulation from day-to-day politics. (Would anybody want to put Congress in charge of interest rates?) Third, monetary policy done right is a technical thing, like running a utility. It’s basically apolitical.

The first two reasons remain as persuasive as ever. The third, however, was always suspect -- and never more than now. Monetary policy isn’t purely technical. It has real-world consequences. Changes in interest rates hurt some and help others. And central banks sometimes have to decide how quickly to curb inflation -- with a short, sharp recession, say, or with gentler pressure applied for longer. Such decisions are hardly apolitical.

The point should be obvious to anyone who has been paying attention to the Fed policy for the last decade. Resorting to unconventional measures was necessary after the recent recession. The central banks were right to adopt these methods -- governments failed to use fiscal policy effectively, leaving the Fed and its counterparts no choice.

QuickTake The Fed Eases Off

Independence isn’t all or nothing. Central banks are already politically accountable in various ways. They have operating mandates; Fed governors are appointed by the president and confirmed by the Senate; Congress hears testimony and asks questions, as it did last week. In effect, a balance has been struck. Is this now in jeopardy? Does it cross a line when politicians -- especially finance ministers or heads of government -- directly criticize central-bank decisions?

It depends. Governments can criticize central-bank choices without disputing that those choices are the central bank’s to make. That’s sufficient independence to deliver the essential benefits of non-inflationary public finance and stable financial conditions. The line would be crossed, though, if governments said, "Do as we tell you, or else."

Disagreement is OK. Intimidation is not. May’s comments fell well short of that line. Trump’s interventions, unsurprisingly, are more worrying. He hasn’t just disagreed with Yellen, he’s accused her of failing to do her job -- and intimidation, after all, is how he likes to do business.   

The Fed sometimes makes mistakes and politicians should be free to say so. Central banks should listen, while refusing to be cowed. And the president-elect? He needs to learn that the Fed is one institution he shouldn’t try to bully.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.