Niall Ferguson is the Milbank Family senior fellow at the Hoover Institution, Stanford
There was a time, in the aftermath of the financial crisis, when central bankers were the only game in town. In a book with that title, economist Mohamed El-Erian warned that, with their exotic crisis-fighting measures – zero interest rates, quantitative easing, forward guidance – the central bankers risked overreaching.
This was prescient. Three years later, the men and women who make monetary policy are very far from the only game in town. Now they’re the ones being gamed.
On Wednesday, the Federal Reserve’s chairman, Jerome Powell explained at a press conference why he and his colleagues had decided to cut U.S. interest rates by a quarter of a percentage point. Given that the United States’ economy is still growing at a reasonable 2.1 per cent and has the lowest unemployment rate since December, 1969, the decision took a bit of explaining. Mr. Powell’s best argument, aside from persistently low inflation? “Trade policy uncertainty," which he referred to at least two-dozen times, twice as often as the other excuse (“weak global growth”).
Over the past year, President Donald Trump has repeatedly criticized the Fed for wanting to hike rakes and then for not cutting rates enough. His response to the Fed’s quarter-point cut was swift. The very next day he tweeted his intention to “start, on September 1st, putting a small additional Tariff of 10 per cent on the remaining 300 Billion Dollars of goods and products coming from China into our Country.”
New York and Washington are full of commentators who went to Harvard, Yale and Princeton and consider themselves much smarter than Mr. Trump. They snicker when he calls himself a “stable genius.” But this President is crazy like a fox. His behaviour may seem just plain dumb, but it is, in fact, calculated to outsmart the Ivy League types.
The Fed says it’s cutting rates because of trade uncertainty that Mr. Trump himself has almost single-handedly caused. But it’s only doing a lousy quarter per cent. The crazy-fox response is to threaten yet more tariffs on Chinese goods on Sept. 1, two weeks before the next meeting of the Federal open market committee, which sets the Fed’s interest rate.
Now tell me who is the only game in town.
Officially, the readiness of central bankers to cut rates pre-emptively to avert recession, or at least to scrap rate hikes and further “quantitative tightening,” reflects a fundamental shift in economic thinking. The post-2008-9 assumption was that the goal was to fight the crisis and then “normalize” – that is, get rates back up to pre-crisis levels. But the counter-argument – that we face a problem of secular stagnation, not just a cyclical hangover – appears to have won the day. No one now believes that interest rates can return to where they were before 2008.
At the same time, there has been a widespread abandonment of the old principles of fiscal policy. Now even Olivier Blanchard, former chief economist at the International Monetary Fund, says that rising public debts are less of a problem than used to be thought. This is not something I expected to hear from a senior fellow of the Peterson Institute for International Economics, but then Peter Peterson – the lifelong fiscal conservative whose name the institute bears – died last year.
These shifts in monetary and fiscal theory are a huge stroke of luck for populists in power. (I refuse to countenance the disgraceful idea that they are in fact a rationalization of the central bankers’ rapidly dwindling political independence.) For whatever reason, the Federal open market committee has become the committee to re-elect Mr. Trump. This isn’t because Mr. Trump has successfully browbeaten the Fed staff with his tweets, or so they insist. It’s because their estimates of the “natural rate of interest” are just really, really low.
And it’s a similar story in Britain, Europe and Brazil.
Give the populists their due. They intuitively knew that there was something crazy (in the non-fox-like sense) about raising interest rates and trying to balance budgets in the post-crisis world, just as they understood that voters had tired of ever-freer trade and rising immigration rates. It was the eggheads (myself among them, I admit) who wanted sound money and austerity.
Could anything break this trend, whereby falling interest rates and painless deficits help populists stay in power? One answer I can think of is a large-scale war, which has tended to be the thing, historically, that drives inflation expectations and interest rates upwards. But that, too, is something the populists have pretty much ruled out.
Another game-changer would be an election surprise. Markets seem to love a right-wing government unconstrained by monetary and fiscal rules. They may feel differently if a left-wing government inherits this lack of constraint. The difference between technocracy and democracy is that there’s always more than one game in town. And not all crazy foxes are on the right.
©Niall Ferguson/The Sunday Times, London