US President Donald Trump,left,is ''not even a little bit happy'' with his choice of Jerome Powell,as US Federal Reserve chairman.Credit:Bloomberg
Those policies inflated financial and real estate assets to an extent that,before the market meltdown,they had arguably created financial bubbles in the US and elsewhere.
Trump’s tax cuts and increased spending,occurring as they did at a moment when the US economy was already performing strongly,forced the Fed to move more aggressively to pre-emptively head off the prospect that the US economy could overheat and generate a resurgence of inflation.
Since the mid-1980s,there has been a widespread (although not unanimous) view that it is important and useful to have a central bank that is largely independent of the government of the day.
The key responsibilities of most central banks,including our Reserve Bank,are maintaining price stability by targeting and containing inflation,pursuing full employment and protecting financial stability. The central banks are focused on their domestic economies rather than influences like financial markets,except to the extent that they might affect the real economy.
Where politicians would want monetary policies to boost their popularity and prospects of re-election – Trump,until recently,had pointed to the booming stockmarket as an indicator of the success of his policies – the central banks have a longer-term perspective.
Where Trump,with his tax cuts and big spending increases,provided a pro-cyclical boost to an already strong economy,central banks tend to err on the side of counter-cyclicality,searching – with limited and quite blunt instruments - for that sweet spot where economic growth is neither too strong,risking inflation,nor too weak,threatening recession.
The Fed is trying to normalise US monetary policies after nearly a decade of unconventional policy measures. Financial markets that were inflated by its policies – that have relied on its ultra-cheap liquidity to underwrite their risks – were inevitably going to be deflated.
Even without Trump’s erratic style of governing,his trade policies and his assault on post-war global institutions and settings,it would have been a difficult and delicate process to normalise those monetary policy settings without causing severe financial market disruptions. Sacking the Fed chair wouldn’t obviate the need to move towards more conventional policy settings.