Lessons for the Fed from my time at the helm of Argentina’s central bank
As I learnt to my cost, attacks on the independence of the institution never end well
Martin Redrado
President Donald Trump’s attacks on the independence of the US Federal Reserve may bring him short-term gains, but in the medium term they will inflict long-lasting damage on growth and prices.
I know this from painful personal experience in Argentina almost 16 years ago, when I was in charge of the central bank.
After successfully navigating the global financial crisis, President Cristina Fernández de Kirchner called me into her office on the morning of December 12 2009.
Without offering any technical explanation, she asked me to transfer, by decree, $6.5bn of the central bank’s reserves to the national treasury.
My immediate reaction was that the bank’s charter did not allow me to do this, and that in any case it would have a deleterious effects on financial markets and the economy as a whole.
Kirchner, however, could not be persuaded and insisted that she wanted the transfer implemented.
I decided to ask for reports on the draft decree from all the technical departments of the central bank, knowing that these would take several weeks to appear.
As a result of the delay, in January 2010 Kirchner issued a decree firing me with no cause.
I decided to go to court to defend the institution I led.
A day later, a judge reinstated me.
Kirchner denounced what she saw as a conspiracy against her government spearheaded by the central bank and the judiciary.
Despite the decree to seize the reserves being suspended by a judge, Kirchner’s behaviour made my job impossible, and I eventually left on January 29 2010.
By the following year, the effects of her policies were being felt.
Exchange rate controls were established, leading to rampant inflation and a stagnant economy.
Five years later, the central bank was left with no reserves, an official price for the US dollar and four parallel rates that were about 50 per cent higher, and no economic growth.
Kirchner’s party would go on to lose the 2015 election.
Prior to Kirchner’s intervention, Argentina had followed a free-floating currency regime with a single exchange rate and no capital controls.
It also held liquid and positive international reserves, which backed the monetary base and all the monetary liabilities of the central bank.
This allowed us to successfully overcome any shock, while also protecting the deposits of ordinary Argentines.
There are three simple lessons for central banks around the world, including the Fed, to draw from this story.
First, when there is an attack on the independence of the central bank, take the case to court, underscoring that nobody, not even the nation’s president, is above the law.
Second, make the case to the legislature.
And third, go public.
Nowadays, many central banks are forced to grapple with “fiscal dominance”, with pressure to lower interest rates as a means of reducing the cost of public sector debt.
I have learnt from experience in different emerging markets that while a central bank should certainly co-ordinate with the treasury or finance ministry, it should not allow itself to be subordinated.
Central banks should be autonomous, but this does not mean isolated.
After inflation reached 211 per cent in 2023, Argentina seems to have learnt the lesson.
What I learnt from my run-in with Kirchner is that interfering with the independence of the central bank leads to a loss of credibility in economic policy.
And once confidence is lost, uncertainty follows.
In the US, the effects of Trump’s attacks on Fed chair Jay Powell are already discernible in the widening gap between two-year and longer-term Treasury rates.
I hope my experience might serve as a warning not to make similar mistakes from which everybody will suffer.
The writer is director of Fundación Capital and former president of the Central Bank of the Republic of Argentina
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