Populism, intervention – and inflation

In 1970, the then-US president Richard Nixon appointed economist Arthur Burns as head of the Federal Reserve, the US central bank. “I respect his independence,” said Nixon. “However, I hope that independently he will conclude that my views are the ones that should be followed.” Burns duly kept interest rates low ahead of the 1972 election to avoid an economic slowdown and thus keep Nixon in the voters’ good books. Nixon won, but the mixture of an overheated economy and loose monetary policy helped give rise to the stagflationary grimness of the 1970s.

Since then, presidents, prime ministers and politicians in general have tried to keep their interventions in monetary policy to a minimum. Indeed, central-bank independence (across most of the developed world at least) has become a cornerstone of modern economic policy.

Whether that has made much difference to the course of events over the past two decades is highly debatable. But whatever the counterfactual, this convention of central-bank independence – like so much of the received wisdom of the globalisation era – is being thrown out of the window.

Last week, Larry Kudlow – Donald Trump’s top economic adviser – discussed monetary policy on Fox Business. “My hope is that the Fed, under its new management, understands that more people working and faster economic growth, do not cause inflation… My hope is they understand that and they will move very slowly.” To be fair, Kudlow is not saying anything out of character, and given Japan’s experience of record-low unemployment combined with minimal inflation, he may even be right. But this is not a conventional view, and it’s interesting that this pressure is being brought to bear on the Fed just ahead of this year’s mid-term elections.

Trump isn’t just dropping hints to the Fed. He’s pushing for Saudi Arabia to pump more barrels of oil to help keep a lid on prices, in exchange (presumably) for the US making life that bit harder for Saudi’s arch-rival Iran. US consumers pay very little tax on petrol and so are particularly sensitive to changes in oil prices – the last thing Trump wants is for prices at the pump to spike when voters are going to the polls.

Trump is far from the only born-again interventionist out there. Indeed, the upsurge in populism (on both left and right) is a direct reaction to voters feeling disempowered by an era in which central banks, multinationals, and supranational organisations appeared to make all the important decisions, with national governments reduced to being rule-takers rather than rule-makers. This trend has further to run. Expect more intervention. Expect more trade friction. Expect more pressure for higher wages. And if you’re an investor, what does all that mean? Expect more inflation.