Conflict of interest rates

Trump's investigation into the Fed Chair is about power, not price stability

And the Golden Globe for Best Supporting Statistic goes to… Inflation. Specifically, how prices in Britain rose by roughly 750% in the 25 years to 1992 — more than in the previous 250 years. Following the collapse of the Bretton Woods system in 1971, when US President Richard Nixon unilaterally ended the convertibility of the dollar to gold, the UK lost what former Bank of England Governor Mark Carney (whatever happened to him?) called its “nominal anchor”.

Subsequently, policymakers pursued all manner of Acme-branded schemes in pursuit of price stability: incomes policies, price controls, monetary aggregate targeting and exchange rate targeting. None were terribly successful. It took central bank independence to finally tame the inflationary tiger.

Retail Price Index (Bank of England)

For this reason, independence is no act of technocratic vanity — it is designed to insulate long-term economic stability from short-term political incentives. That is because while politicians face elections and therefore pressure to avoid unpopular decisions such as making voters’ mortgages more expensive, central bankers are largely unmoved by such petit bourgeois concerns.

For British politicians, the benefits of central bank independence were almost insultingly swift. Long-term gilt yields fell by 50 basis points, of which economists later estimated half could be attributed to the lower risk premium charged by the markets. This cut the real cost of government debt by a remarkable 10%.

So, if central bank independence leads to lower inflation and cheaper debt, why has the US Department of Justice launched a criminal investigation into Jerome Powell — in an apparent attempt to unseat the chair of the Federal Reserve?

Powell to Trump: drop dead

A few hours ago, Powell released a statement, in which he accused the president of, in effect, extortion. This was a little bit heroic, because anyone who stands up to Donald Trump, whether from within or without the Republican Party, faces the very real prospect not only of political retribution, but threats of physical violence.

Central bank statements ought never be interesting. Ideally, they should be impenetrable even to those with doctorates. But this one was riveting. Powell said: