Draghi warns of Trump threat to Fed

Business | Bloomberg and Reuters 15 Apr 2019

European Central Bank President Mario Draghi took the rare step of weighing in on the hot debate over whether US President Donald Trump is undermining the independence of the Federal Reserve.

Speaking to reporters at the International Monetary Fund meetings in Washington, Draghi said he was "certainly worried about central bank independence" and especially "in the most important jurisdiction in the world."

Draghi's intervention on Saturday is notable given central bankers are usually loath to comment on politics or events in economies other than their own.

He was later seen in conversation with Fed chairman Jerome Powell, who Trump has frequently accused of not doing enough to stoke the US economy.

How free central banks are from political meddling has been a key theme on the sidelines of the IMF talks, which took place as Trump looks to nominate two political loyalists to the Fed's board of governors: former pizza executive Herman Cain and Stephen Moore, a fellow at the conservative Heritage Foundation.

The nomination of the two controversial candidates and persistent calls for rate cuts has raised the specter of government interference, challenging a fundamental tenet of modern central banking.

Politicians from Turkey to India have also been accused of seeking to sway their monetary policy makers in the hope they will act to spur demand. The risk is investors begin to doubt the dedication of such authorities to fighting inflation, pushing up market interest rates and potentially sapping the growth that governments want to see. "If the central bank is not independent then people may well think that monetary policy decisions follow political advice rather than objective assessment of the economic outlook," Draghi said. "Central banks ought to be left free to choose what is the best way to comply with" their mandates.

Also when asked about the Fed candidates and other pressures on central banks, IMF managing director Christine Lagarde said that for such institutions, "independence has served them well over the course of time and hopefully will continue to do so."

South African Reserve Bank governor Lesetja Kganyago and Swiss National Bank president Thomas Jordan both made the point that central banks are already held accountable by virtue of the goals they are set by legislatures.

"The clearer the mandate of a central bank, the easier it is to hold a central bank accountable," Kganyago said. Jordan said that "central bank independence is extremely important" and that he's "convinced that central banks should stick to a relatively narrow mandate. Both go together."

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