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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
British Airways revamps Avios scheme bringing down flight prices to £1With the new Avios part-payments scheme you can now bag a British Airways flight for as little as £1
-
RBS to close a fifth of branchesRoyal Bank of Scotland plans to shut 18 branches across Scotland, resulting in the loss of 105 jobs. We have the full list of closures.
-
Beat the cost of living crisis – go on holidayEditor's letter As inflation rages, energy bills soar and the pound tanks, what’s a good way to save money this winter? Go on holiday, says Merryn Somerset Webb.
-
How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
-
Don't be scared by economic forecastingEditor's letter The Bank of England warned last week the UK will tip into recession this year. But predictions about stockmarkets, earnings or macroeconomic trends can be safely ignored, says Andrew Van Sickle.
-
The biggest change in the last 17 years – the death of the “Greenspan put”Editor's letter Since I joined MoneyWeek 17 years ago, says John Stepek, we’ve seen a global financial crisis, a eurozone sovereign debt crisis , several Chinese growth scares, a global pandemic, and a land war in Europe. But the biggest change is the death of the “Greenspan put”.
-
The wolf returns to the eurozone’s doorEditor's letter The eurozone’s intrinsic flaws have been exposed again as investors’ fears about Italy’s ability to pay its debt sends bond yields soaring.
-
Things won't just return to normal – that's not how inflation worksEditor's letter You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.
-
Car hire and the strangeness of the post-pandemic economyEditor's letter A global shortage of hire cars and unusually high hotel occupancy rates sum up the post-pandemic global economy in a nutshell, says Merryn Somerset Webb, with enhanced demand meeting restricted supply.
-
Why we need to get a grip on our governmentEditor's letter Our government is trying to do too much, enacting policies that are destructive to the private sector. It needs to drop the the feel-good nonsense and create policies that lead to long-term wealth, says Merryn Somerset Webb.
