Monetary policy is no job for the politicians

At a time of such sweeping uncertainty, anything predictable is reassuring.

This week, that reassurance came from the Bank of England’s monetary policy committee, which yesterday voted unanimously to keep interest rates on hold.

This had been widely expected, but that doesn’t mean that central bank decisions should be taken for granted. Across the Atlantic, the Federal Reserve raised eyebrows on Wednesday, with chair Jerome Powell not only deviating from his previously stated schedule by holding interest rates, but announcing that they were unlikely to increase in 2019.

Powell has strong justifications for this U-turn. The US is facing a slowdown, with February’s job creation figures the worst since September 2017, and there are concerns on the horizon of the impact of Donald Trump’s trade war with China.

Nonetheless, it is difficult to separate the Fed’s change of course from comments made in the past by the President.

Trump – who, according to former Fed chair Janet Yellen, does not understand macroeconomic policy – has openly criticised Powell and the central bank’s monetary tightening policy, saying that rate hikes hurt the economy, and tweeting in December “the only problem our economy has is the Fed”.

Powell’s decision to hold rates likely has nothing to do with the President’s urging, but even the speculation that the independent Fed may have bowed to pressure from the White House is worrying.

Government meddling in monetary policy can be an early sign of a country on the brink of constitutional chaos.

Dictators often take control of the money supply to fuel short bursts of growth or fund their pet projects before tanking the economy, while there is a trend of authoritarian leaders (such as Viktor Orban in Hungary and more recently Recep Tayyip Erdogan in Turkey) chipping away at central bank independence in a bid to strengthen the executive branch of government.

Of course, if foreign investors start to doubt the autonomy of central banks, the country’s economy can quickly crumble. There is a reason why politicians are no longer put in charge of interest rates in most developed democracies.

Trump is obviously not one for living by the norms of international governance, but anyone invested in the global economy should hope that his comments have not influenced Powell, and that he is quietly encouraged to leave the Fed out of his Twitter tirades.

Here in Britain, we can be grateful at least that Theresa May has other things on her mind at the moment than telling Mark Carney how to do his job.