Powell’s global peers to cheer for the Fed in rebuke to Trump

Christine Lagarde, president of the European Central Bank (ECB), from left, Kazuo Ueda, governor of the Bank of Japan (BOJ), and Jerome Powell, chairman of the US Federal Reserve, at the Jackson Hole economic symposium in Moran, Wyoming, US, on Friday, Aug. 25, 2023.

Central bankers gathering in Jackson Hole, Wyoming this week for the Federal Reserve’s annual conference are prepared to go beyond swapping research papers and savoring mountain views — they’re coming to defend Jerome Powell.

The Fed chair is facing relentless attacks from President Donald Trump for refusing to cut interest rates. Trump has also pledged to replace Powell next year when his term as chair expires with someone more compliant. The offensive has rattled policymakers from around the world, raising fears that central-bank independence — seen as essential to keeping inflation in check — could be undermined.

Among those making the trip to the Teton Range are European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey. Expect them to voice their strong support for Powell and warn of the dangers that come when elected officials put pressure on monetary policymakers — especially if political leaders in more fragile economies feel emboldened by Trump.

“Independence is part of the DNA of central banks,” Bundesbank President Joachim Nagel told Bloomberg News. “It would be more than desirable if this were recognized everywhere.”

For Powell’s counterparts, the Aug. 21-23 symposium is another opportunity to bring that message to the front lines of the war on independence, as they have at prior gatherings this year.

At the Bank for International Settlements’ annual meeting in late June and the European Central Bank’s Sintra conference in early July, “it was the world of central bankers rallying around Jay and the Fed, publicly backing Fed independence,” said Adam Posen, president of the Peterson Institute for International Economics, who attended both.

“Now, this is their opportunity to do it for a US audience,” said Posen, who wrote his doctoral dissertation in economics on the history of central bank independence.

Until recently, such messaging wouldn’t have been needed on US shores.

Volcker Legacy

After the Fed failed to rein in inflation in the 1970s – and sometimes heeded presidents’ calls for lower interest rates – the central bank began setting policy with determined independence under Chair Paul Volcker. That approach, already taking hold in other developed countries, then spread to emerging economies as well.

Politicians continue to direct central banks to target low inflation, or low inflation and full employment, but otherwise have left them alone to decide what policy would best serve the economy in the longer run. That’s proved the most effective way to keep inflation at bay, research has shown.

While elected officials around the globe still criticize their monetary mandarins — Australia’s Treasurer last year said rate increases were “smashing the economy” — Trump’s sustained public pressure campaign on Powell since returning to the White House in January represents a jarring, if not unprecedented, turn in a developed economy.

This has come with consequences in financial markets. Along with a chaotic tariff campaign and concerns over the deteriorating fiscal outlook, Trump’s attacks on the Fed fueled a “Sell America” trade that saw the dollar plunge more than 10% in the first six months of the year against a basket of developed-market currencies, its worst first-half performance since 1973.

For now, the global spillover from a weak dollar has been largely positive. Emerging market bonds and currencies have strengthened, offering respite from earlier dollar appreciation that had forced central banks in India and Indonesia to prop up their currencies. A weaker greenback has also allowed some central banks to ease without fear of undermining their currencies.

There’s been little fallout from the dollar’s slide at home either. Stocks are near record highs and there are few signs inflation is becoming a serious problem, for now. But Trump’s constant critique of Powell could undermine confidence in monetary policy.

That’s a phenomenon that’s played out in countries like Turkey, Brazil and Colombia, as populist politicians challenged the practice of independent central banking. An ECB paper found that between 2018 and 2020, de facto independence deteriorated for nearly half of central banks in economies accounting for 75% of global gross domestic product.

“Through history, we have had quite substantial episodes where monetary policy mismanagement has led to devastating effects in inflation, in financial systems, affecting the well being of individuals, of firms, oftentimes bringing countries to a brink,” Augustin Carstens said in June at his last press conference as general manager for the Bank for International Settlements, an organization of central banks.

Court Protection

In the US, the Supreme Court has shielded Fed officials from being directly removed by the president without cause, which has quieted Trump’s threats to fire Powell. Yet the president is able to put his stamp on the central bank by nominating new people to vacancies.

Earlier this month, Trump said he’d appoint White House official Stephen Miran to an open slot on the Fed board. With Powell’s term as chair ending in May, he’ll be able to fill that crucial position, as well.

Most of the candidates the administration is considering for the top job have said the Fed should be lowering rates. Yet Powell and his fellow officials have so far this year kept their benchmark unchanged at a level where most economists see it still weighing on the economy, at least a little bit.

Investors expect the Fed will respond to recent weak labor market data by finally lowering rates in September. But given lingering concerns over inflation, Powell may hold back from telegraphing a cut when he speaks from Jackson Hole on Friday.

In public, Powell has been stone-faced when responding to questions about Trump’s pressure campaign. Behind closed doors, it’s a different story.

Christine Lagarde, president of the European Central Bank (ECB), from left, Kazuo Ueda, governor of the Bank of Japan (BOJ), and Jerome Powell, chairman of the US Federal Reserve, at the Jackson Hole economic symposium in Moran, Wyoming, US, on Friday, Aug. 25, 2023.

In April, he delivered an impassioned defense of central bank independence when he addressed policymakers and finance ministers during a meeting at the International Monetary Fund, triggering applause from the audience and equally strident remarks from his peers, insiders at the meeting say.

Reserve Bank of India Governor Sanjay Malhotra recalled the moment at a recent event and said he admired Powell for standing strong. “He is doing a very good job. Maintaining the independence of the central bank is very important.”

Standing Ovation

ECB President Christine Lagarde also praised Powell at her bank’s version of Jackson Hole in Sintra, Portugal, saying he represents “the standard of a courageous central banker.” He got a standing ovation during a panel with peers when he brushed off political pressure and reinforced the bank’s commitment to price stability and full employment.

A similar reception awaits Powell in Jackson Hole. The official theme of the symposium is, “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy.” But the importance of non-partisan monetary policy is likely to dominate.

“It’s a unified front,” said David Beckworth, senior research fellow at the Mercatus Center at George Mason University. “Jackson Hole and other conferences where central bankers come together, is kind of like going to church for them. They’re gonna get together, they’re going to share and talk a very similar belief system.”