With price increases at the fastest pace in decades across Europe, the Americas and the Antipodes, there are good reasons to let monetary chiefs get on with their job without political pressure. Central banks, at least in theory, are able to act quickly and immune to the horse-trading that accompanies legislative solutions.
For governments, it’s a win-win: they can blame any failure while basking in success. There was a strong whiff of such empowerment in President Joe Biden’s remarks to Federal Reserve Chairman Jerome Powell on Tuesday. “My plan is to fight inflation,” the president said. “It starts with a simple proposition: respect the Fed, respect the independence of the Fed, which I have done and will continue to do.”
Fed autonomy is considered the gold standard in many parts of the world – much as Donald Trump abused Powell and floated the idea of ousting him. (Even at the best of times, that independence isn’t completely pure, and Fed officials pay close attention to the mood in Congress.) So why did Biden feel compelled to point out that Powell had the hands free ? The Fed chief reportedly recognized the opportunity and peril implicit in those comments. Go ahead and squeeze as much as you want, but it’s on you, it could have been subtext.
Sure, elected leaders want inflation to come down, but they also love a strong job market and hate recessions. Is Biden ready to pay the ultimate price for telling Powell to get on with it? I’m skeptical.
Powell probably doesn’t want the R-word either. But he’s already acutely aware that the global economy is losing altitude. China will struggle to grow much this year and recession is on everyone’s lips in the UK. Inevitably, analogies were drawn to Paul Volcker, the Fed chairman from 1979 to 1987 who smashed inflation at the cost of a deep collapse – and had his own share of uncomfortable conversations in the Reagan White House. Polls are already looking dire for Democrats in November’s midterm elections. Slower growth and a colder job market won’t really help.
As heroic as Volcker was, he may not be a perfect analogue for the current moment. (He died in 2019.) The world of the early 1980s was pretty contained: the Cold War was fought with intensity and half the globe barely had capital markets. China was a minnow. Volcker struck when he did and with great force because inflation had been left to smolder for at least a decade. This is not comparable to the current situation, wrote Ethan Harris, global economist at Bank of America Corp., in a recent note. “The last thing the world needs now is a political shock the size of Volcker,” he noted. It “more or less deliberately created one of the biggest recessions in modern history. This time it’s different. Supply chain bottlenecks – there’s not much central banks can do about them – have likely peaked and a key measure of inflation is set to ease by the end of the year . A policy-induced downdraft could be a problem for the next year, Harris believes.
Biden’s remarks must also be seen in the context of a broader defensive in Washington. Earlier this week, the president wrote an op-ed for the Wall Street Journal about how he’s going to lick inflation. The monthly jobs report, perhaps the most political economic release until soaring inflation, is due Friday. Senior officials were careful to say that job growth is likely to slow and Biden described this as “a sign that we are successfully entering the next phase of recovery.” It seems like a good time to do a mea culpas. Treasury Secretary Janet Yellen told CNN she made a mistake when she predicted last year that high prices would be short-lived.
Yellen, who preceded Powell as Fed chairman, was in good company. Central banks around the world were surprised by the lack of inflation in the aftermath of the 2007-2009 global financial crisis. Rising prices weren’t actually hiding behind every upbeat number. This has led policy makers from Sydney to Frankfurt to focus on labor market management. They declared a preference for results, not projections.
The risk now is that if the authorities wait for clear and unambiguous signs that inflation has stopped boiling, they could miss the downward turn in the economy. This could force them to cut their rates more than they otherwise would have. The cycle would repeat itself. Independence became an attractive way to set the price of money because central banks could act quickly, if necessary. This assumes that they are not yet vigorously fighting the last war.
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.
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