Both the ECB and the Fed should ignore bullying from Donald Trump
The editorial board
Mario Draghi, the outgoing European Central Bank president, was heckled by US President Donald Trump on Twitter © AFP
Setting monetary policy at a time of profound uncertainty about the way that economies are functioning is never an easy task. Doing so under intermittent volleys of criticism from the White House, directed at monetary policymakers outside America as well as within, only makes it harder. And for the head of a central bank leaving his post after a long and successful tenure, there is an extra layer of complexity in trying to bind in a potential successor who has often been critical of the institution’s policy regime.
There were two big events in central banking this week. One of them — the Federal Reserve keeping rates on hold but signalling likely cuts later in the year — was largely expected. The other, a speech from European Central Bank president Mario Draghi suggesting looser policy than the market was pricing in, was less so, and caused an abrupt weakening in the euro.
During his exemplary eight years in office, due to end this autumn, Mr Draghi’s public comments have rarely been careless, and it is very likely his signalling was deliberate. The ECB presidency, unhelpfully included as one of the prizes in an intergovernmental bargaining game for top EU policy jobs, may go to Jens Weidmann, the current president of the Bundesbank.
Mr Weidmann has misguidedly opposed the super-loose monetary policy through which the ECB has averted economic catastrophe in the eurozone. Mr Draghi’s departure will be a great loss, but with this speech he has at least made it more costly for a successor to make a hawkish turn.
No good deed in central banking these days goes unpunished, and Mr Draghi’s reward was to be heckled on Twitter by Donald Trump, who accused him of deliberately weakening the euro. This is, of course, absurd. Certainly, the exchange rate channel is one through which looser monetary policy works. But in a relatively closed economy like the eurozone it would be a foolish central bank that tried to manage growth and inflation primarily by manipulating the currency.
Across the Atlantic, Jay Powell, chairman of the Federal Reserve, must have felt a surge of solidarity with Mr Draghi. He has himself repeatedly been pressed by Mr Trump to loosen policy. Such pressure makes the messaging difficult when, as now, objective reality is also suggesting lower rates.
If the Fed’s expectations of loosening later this year are fulfilled, there will no doubt be speculation that Mr Powell and his fellow open market committee members have given way to presidential bullying. So be it. The central bank cannot get into a game where it systematically sets policy that is wrong for the US economy just to prove its independence from the White House.
The Fed faces a similar problem over Mr Trump’s trade policy and its negative effects on US and global growth. The central bank would be wrong to set interest rates purely on the basis of Mr Trump threatening more tariffs. His bluster — as with Mexico over immigration — often comes to nothing. If and when the president does increase distortions and thereby damages economic growth, the Fed must not allow itself to be bound by tactical concerns. To conclude that loosening policy would give succour to Mr Trump’s protectionism would be misguided.
Setting interest rates in an environment of hostile politics requires strong nerves. Decisions must be guided by a determination neither to give in to political pressure nor to keep policy unnecessarily tight purely to defy it. This week, the ECB and the Fed both indicated they were on the right track. It will take fortitude for them to continue down it.
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