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, published in January 2016, 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 on, the men and women who make monetary policy are very far from the only game in town. Now they’re the ones being gamed.
Last Wednesday, Federal Reserve Chair Jerome “Jay” Powell explained at a press conference why he and his colleagues had decided to cut interest rates by a quarter of 1 percent. Given that the economy is still growing at a reasonable 2.1 percent and has the lowest unemployment rate since December 1969, the decision took a bit of explaining. 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 Trump has repeatedly criticized the Fed for wanting to hike rates 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% on the remaining 300 Billion Dollars of goods and products coming from China into our Country.”
New York and Washington, D.C., are full of commentators who went to Harvard, Yale, and Princeton (which Powell attended) and consider themselves much smarter than Donald Trump. They snigger when he calls himself a “stable genius.” But this president is crazy like a fox. His behavior may seem nuts or 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 Trump himself has almost single-handedly caused. But it’s only doing a lousy quarter-percent. 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 Markets 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 preemptively to avert recession, or at least to scrap rate hikes and further “quantitative tightening,” reflects a fundamental shift in economic thinking. The post-2008-09 assumption was that the goal was to fight the crisis and then “normalize,” i.e., to 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, formerly 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 ever expected to hear from a senior fellow of the Peterson Institute for International Affairs, but then Pete 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 Markets Committee has become the Committee to Reelect Trump. This isn’t because Trump has successfully brow-beaten 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 major war, which has tended to be the thing, historically, that drives inflation expectations and interest rates upward. But that, too, is something the populists have pretty much ruled out. They saw what became of another set of eggheads — the neoconservatives — when they decided to revive war as an instrument of policy after 9/11.
But 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 is a senior fellow at the Hoover Institution at Stanford University.