Hello there,
Carmel is off today, so I’m writing this week’s newsletter - and I bring you the story of a low-key but high-stakes drama that could reshape the world economy.
In normal times, central bankers want to be boring. They’re successful when policy is so uninteresting, nobody really pays attention. Yet the world’s top two central bankers, Fed Chair Jerome Powell and ECB President Christine Lagarde, are both at the center of political dramas.
Powell is contemplating staying on the Fed board after his term as chair expires in May to prevent President Donald Trump from filling his seat. Meanwhile Lagarde is reportedly planning to leave early so that her replacement can be finalized before next year’s French presidential election, which the far-right National Rally is favored to win.
Both moves are intended to cement their institutions’ independence and safeguard them from day-to-day political interference by a populist government.
The meddling fears are not unjustified. Trump has demanded lower interest rates, lashed out at Powell and attempted to fire another Fed governor in a case that is in front of the U.S. Supreme Court. In France, RN has talked about the possibility of using the ECB to buy up French government bonds to help ease France’s increasingly debilitating debt burden. In short, both are toying with the idea of using the central bank to lower their country’s debt costs - the top no-noin modern central banking, since it inevitably fuels inflation.
But any such actions by Powell and Lagarde would be risky. Central banks are independent but not unaccountable. Personnel moves that depart from long-standing norms raise concern that central bankers are circumventing the democratic accountability process.
Even if the pretext is preserving independence and the moves are perfectly legal, they still raise the specter of engaging in politics. In Powell’s case, because Trump would be prevented from making an appointment presidents normally get to make. And for Lagarde, because a political constellation would cement its influence over the bloc’s most important financial institution far into the future. That could justify some criticism and embolden governments to take on central banks, using the premise that they have already meddled in politics.
The stakes are exceptionally high. If the Fed bows to political pressure, people will lose trust in its commitment to fighting inflation. Higher prices then push up longer-term borrowing costs, putting a brake on growth and in the worst case, inducing a recession.
The world could look the other way if this happened anywhere else, but as the largest economy, the U.S. exports its economic fortunes.
When its IT sector booms on AI investment, everybody benefits. And when it suffers from high inflation or economic instability, everyone else suffers too. When its central bank loses independence, everybody will come under pressure to rethink inflation targeting and independent central banking.
But that’s enough drama for one day. For a happier ending, check out this lovely story of a wandering husky named Nazgul gatecrashing an Olympic cross-country ski race this week.
As always, we'd love to hear from you by hitting reply on this email or finding Carmel on LinkedIn. And be sure to check out this week’s Econ World podcast. Carmel speaks with Reuters journalists David Gaffen and Michele Gershberg about the economic impact of weight loss drugs. These little pills (or jabs) aren’t just slimming waistlines - they could also shake up labor markets and public finances, and they may be coming to a pharmacy near you.
