February 5, 2018
Change is afoot at the top of Central Banks
The growing powers of central banks will give rise to a different type of boss
The signs are that central bankers of Ms Yellen’s kind (nurtured in academia, immersed in economic models, aloof from politics) are out of favour. The new central-bank bosses will probably, like Mr Powell, be generalists versed in the ways of government and masters of a brief rather than a theory. They are set, in short, to be more agreeable to politicians.–The Economist
WHEN George H.W. Bush lost his presidency after four years in office, he blamed Alan Greenspan for not cutting interest rates fast enough in an election year. “I reappointed him, and he disappointed me,” said Mr Bush of the Federal Reserve chairman. Janet Yellen cannot now be a let-down to President Donald Trump. She chaired her last meeting of the Fed’s rate-setting committee this week; her successor, Jerome Powell, will serve beyond the next presidential election. On both counts—the change at the top and the type of replacement—America is setting a lead that others are likely to follow.
Fed Chairman Jerome ‘Jay’ Powell
The guard may be about to change at other central banks, too. Haruhiko Kuroda, boss of the Bank of Japan, must be reappointed or replaced by April. Zhou Xiaochuan is expected to step down as governor of the People’s Bank of China after 15 years (see article). Big changes are coming at the European Central Bank (ECB). The eight-year term of its vice-president, Vitor Constancio, expires in May. His is one of four jobs on the ECB’s six-strong executive board, including the top post held by Mario Draghi, which are up for grabs in the next two years.
The signs are that central bankers of Ms Yellen’s kind (nurtured in academia, immersed in economic models, aloof from politics) are out of favour. The new central-bank bosses will probably, like Mr Powell, be generalists versed in the ways of government and masters of a brief rather than a theory. They are set, in short, to be more agreeable to politicians.
It is natural for politicians to want to hug central bankers closer. The bankers’ powers have grown since the financial crisis of 2007-08 in part because governments have themselves been unable or unwilling to act. Central banks kept credit markets working, bailed out banks and gave confidence to shaky bond markets. They have since been given, or been given back, powers to regulate banks and to preserve financial stability.
The politicians’ instinct to appoint one of their own will be amplified in Europe by the usual horse-trading among euro-zone members. Spain believes it is high time it got a top ECB job, and is claiming the vice-presidency. Were a Spaniard to be appointed, it might imply Mr Draghi’s job will go to a northern European (though perhaps not to a German) to preserve balance between the euro zone’s core and periphery. France will lose one post, so must gain another. And so on. It is unlikely that someone with the qualities of Ms Yellen or Mr Draghi will emerge from such a messy process.
The decline of the pointy-headed central-bank governor need not be calamitous. Mr Zhou has been influential on a broad range of economic reforms even though—or, perhaps, because—the People’s Bank of China does not have autonomy over monetary policy. Independence can sometimes be a trap. Until Mr Kuroda was appointed in 2013 as its boss, with the express backing of Shinzo Abe, the Prime Minister, the Bank of Japan was loth to fight deflation aggressively in part because it feared it would compromise its independence.
All over bar the Yellen
Yet there is also good reason to worry. An independent central bank can be better trusted to act swiftly to curb inflation. That trust also gives it freedom to cut interest rates when the economy turns down. The kinds of problems set by a booming world economy and elevated asset prices (see article) are best tackled by experts at some distance from politics. What central banks need is not the appointment of officials who are less inclined to disappoint their political masters. It is new thinking about how to make over mighty central banks more accountable to electorates, while at the same time shielding them from day-to-day political pressure.
This article appeared in the Leaders section of the print edition under the headline “Changing of the guard”