Safeguarding A Rules-based Trading System against America First Trade Economics


October 16, 2018

Safeguarding A Rules-based Trading System against America First Trade Economics

by Dr. Mari Pangestu, Universitas Indonesia

http://www.eastasiaforum.org

 

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“Without concerted effort and a coalition of willing leadership, including from the EU and East Asia, the future of the rules-based trading system will remain under threat.”–Dr. Mari Elka Pangestu

Despite expectations that the US Federal Reserve would raise interest rates, capital flows to the United States have led to the appreciation of the US dollar against most major currencies.

The hardest hit countries are Argentina and Turkey, which are experiencing fiscal issues complicated by their political situations. Brazil, South Africa and the emerging countries in Asia have also been affected — albeit at a lower rate of depreciation of their currencies in the 10 to 12 per cent range. Even Australia and China have experienced depreciation of around 8 per cent and 5 per cent respectively.

The level of depreciation experienced by different economies reflects how investors perceive their different fundamental macroeconomic conditions, especially the level of their current account and fiscal deficits and policy outlooks.

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The rising US dollar raises questions about the capacity of emerging economies to service their dollar-denominated debts and the vulnerabilities this could expose in their financial systems. Even if the current economic conditions point to a low potential for contagion from Argentina and Turkey, IMF Managing Director Christine Lagarde recently warned that ‘these things could change rapidly’. The uncertainty that already exists is a clear and present danger.

The uncertainty in the world economy has been increasing since Brexit and the election of President Trump in 2016, and in 2017 as the United States left the Trans-Pacific Partnership and announced many threats to impose trade restrictions. This uncertainty has heightened since January 2018 when US President Donald Trump made good on his threats to remedy bilateral trade deficits — what he sees as ‘unfair trade’ practices against the United States — by imposing tariffs on imported solar panels and washing machines, followed by aluminium and steel.

Since March, the greatest uncertainty has been from the brewing tit for tat trade conflict between the United States and China, which started with the imposition of 25 per cent tariffs on US$50 billion worth of China’s exports to the United States. China retaliated with the same sized tariffs on the same amount of trade from the United States. Trump then escalated the trade war further in September with the announcement of 10 per cent tariffs on US$200 billion worth of China’s exports to the United States.

The US–China trade conflict and the uncertainty surrounding it is expected to have knock on effects on global trade and investment flows. The impact of the reduction in China’s exports to the United States on China’s growth will reduce China’s imports, which in turn will impact the many countries that China has become a major trading partner for.

This means that China and other countries facing US trade restrictions will look for new markets for their goods. The situation has already led some countries to impose restrictions or initiate trade remedy investigations, for instance on steel. This uncertainty has and will continue to influence trade and investment, as businesses evaluate how the increased restrictions will affect their supply chains.

It is too early to tell how large the disruption will be, as it is not easy to dismantle supply chains. But the costs down the line could be great as businesses re-evaluate their trade and investment decisions to insulate themselves from tariffs rather than to maximise their competitiveness.

The most concerning aspect of all this is that, after 75 years of being its greatest advocate, the United States is now the biggest threat to the future of the rules-based trading system that has provided predictability and fairness in the way the world engages in trade. There is no clear light at the end of the tunnel.

The key question is: what is Trump’s intention? Is it to change the rules of the game to benefit the United States and address China’s ‘non-market-oriented policies’ or is it just anti-trade and America First? Assuming it is the former, there are at least three important responses needed.

First is safeguarding the stability of the World Trade Organization (WTO) as the overarching framework to provide predictability, fairness and stability. To this end, it is vital that the WTO dispute settlement mechanism continues to operate. The test case is the Chinese and EU case against US steel and aluminium tariffs and getting past the blocking of panel judge nominations by the United States.

Ensuring that the United States does not use blunt unilateral instruments to address its concerns also means that reforms to the WTO rule book are needed. More must be done to address concerns around intellectual property rights, investment, the environment, labour, competition policy, subsidies, tax, digital data and the treatment of developing countries.

Second, the process of opening-up must continue, with or without the United States. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership is a good start. And it is of the utmost importance that the Regional Comprehensive Economic Partnership negotiations are concluded in November this year. These are all important processes to signal the continued commitment of East Asia to expanding markets and fostering flows of trade and investment.

Third, and what most will agree is the most important process, is unilateral reforms. Given increased global uncertainty and limited policy space for fiscal stimulus, structural reforms are a must for East Asian countries, especially China. These range from trade and investment reforms, as well as reforms related to competition policy, intellectual property, the role of state-owned enterprises and sustainability. As in the past, unilateral reforms are more successfully undertaken when there is peer pressure and benchmarking from international commitments.

Without concerted effort and a coalition of willing leadership, including from the EU and East Asia, the future of the rules-based trading system will remain under threat.

Dr. Mari Pangestu is former Indonesian trade minister and Professor at the University of Indonesia.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Asian crisis, ready or not’.

Jerome Powell’s Big Challenge at The Federal Reserve


March 1, 2018

Jerome Powell’s Big Challenge at The Federal Reserve

by John Cassidy@www.newyorker.com

https://www.newyorker.com/news/our-columnists/jerome-powells-big-challenge?mbid=nl_Daily 022818&CNDID=49438257&spMailingID

“…Powell has taken over the Fed at a delicate moment. With no reliable partner in the White House or on Capitol Hill, he has to finish the job that Yellen started: rolling back the extraordinary measures the Fed took in the wake of the Great Recession without causing a relapse. Even if he succeeds, the journey is unlikely to be without some turbulence.”–John Cassidy

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Dr Janet Yellen welcomes her successor Jerome ‘Jay’ Powell to The Fed

When Jerome Powell, the new head of the Federal Reserve, emerged from the Rayburn House Office Building on Tuesday at lunchtime, he may well have said to himself, “Mission accomplished.” During more than three hours of testimony before the House Financial Services Committee, Powell, who replaced Janet Yellen at the start of this month, didn’t say anything that was particularly unexpected or that raised doubts about his competence.

Still, the Dow fell by three hundred points after Powell’s appearance. Wall Street, which had been expecting the Fed to raise interest rates three times this year, cottoned onto his assertion that the economic outlook had strengthened recently, taking this to mean that four rate hikes, rather than three, could be on the way. Anticipating this possibility, traders sold stocks.

Despite the reaction in the markets, Powell was careful to leave himself plenty of flexibility. He emphasized that he “wouldn’t want to prejudge” the future course of rates, and he pointed out that inflation “remains below our two-per-cent longer-run objective.” In the future, he said, the Fed would “continue to strike a balance between avoiding an overheating economy and bringing . . . price inflation to two per cent on a sustained basis.”

Yellen could easily have spoken these same words. In fact, she did utter very similar ones. Addressing the National Association for Business Economics in September, she said, “Without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession.”

Yellen’s response to the inflation risk she perceived was to raise the federal funds rate slowly. Since an initial move, in December, 2015, the Fed’s gradual policy tightening has taken the funds rate from zero to 1.5 per cent. By historical standards, this is still a very low level, and Powell expressly said that he was working toward “continuity in monetary policy.”

Yellen could easily have spoken these same words. In fact, she did utter very similar ones. Addressing the National Association for Business Economics in September, she said, “Without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession.”

Yellen’s response to the inflation risk she perceived was to raise the federal funds rate slowly. Since an initial move, in December, 2015, the Fed’s gradual policy tightening has taken the funds rate from zero to 1.5 per cent. By historical standards, this is still a very low level, and Powell expressly said that he was working toward “continuity in monetary policy.”

As I noted a few weeks ago, this policy move was the opposite of what most economics textbooks would recommend, partly because it raised the risk of the economy running into capacity constraints. Even before Powell’s testimony, investors had started fretting that Congress’s recent actions would prompt the Fed to raise rates more rapidly, and these worries contributed to the recent wild swings in the stock market.

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Powell, a Republican investment banker who served in the Bush Administration, didn’t openly criticize the policy priorities of President Trump and the G.O.P. But he did point out that “some of the headwinds the U.S. economy faced in previous years have turned into tailwinds,” and he specifically mentioned the recent change in fiscal policy. Asked about the rising national debt, he said, “I think we are not on a sustainable fiscal path.”

Powell also noted that he and his colleagues were still in a “process of discovering” how low the jobless rate could go before inflation started rising. For now, there is no reason to suppose that he will abort this process, which has allowed employment and incomes to grow steadily in the past few years. Inflation remains quiescent, and, despite the G.O.P. fiscal stimulus, it may well remain that way.

Even today, there could be some hidden slack left in the economy, which, in any case, may be less inflation-prone than it once was, thanks to structural shifts such as digitization and globalization. As the Fed watcher Tim Duy, an economist at the University of Oregon, pointed out on Twitter during Powell’s testimony, “our inflation concerns over the past two decades have been much ado about nothing.”

The fact remains, however, that Powell has taken over the Fed at a delicate moment. With no reliable partner in the White House or on Capitol Hill, he has to finish the job that Yellen started: rolling back the extraordinary measures the Fed took in the wake of the Great Recession without causing a relapse. Even if he succeeds, the journey is unlikely to be without some turbulence.

John Cassidy has been a staff writer at The New Yorker since 1995. He also writes a column about politics, economics, and more for newyorker.com.

Has Trumphoria Finally Hit a Wall?


February 6, 2018

Has Trumphoria Hit a Wall?Paul Krugman

When talking about stock markets, there are three rules you have to remember. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy.

So the market plunge of the past few days might mean nothing at all. On one side, don’t assume that there was a good reason for the slide (although the fact that the Dow fell 666 points on Friday hints either at satanic forces or at some mystical link with the Kushner family’s bum investment at 666 Fifth Avenue). When stocks crashed in 1987, the economist Robert Shiller carried out a real-time survey of investor motivations; it turned out that the crash was essentially a pure self-fulfilling panic. People weren’t selling because some news item caused them to revise their views about stock values; they sold because they saw that other people were selling.

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And on the other side, don’t assume that the stock price decline tells us much about the economic future, either. The great economist Paul Samuelson famously quipped that the stock market had predicted nine of the past five recessions. That 1987 crash, for example, was followed not by a recession, but by solid growth.

Still, market turmoil should make us take a hard look at the economy’s prospects. And what the data say, I’d argue, is that at the very least America is heading for a downshift in its growth rate; the available evidence suggests that growth over the next decade will be something like 1.5 percent a year, not the 3 percent Donald Trump and his minions keep promising.

There are also suggestions in the data that risky assets in general — stocks, but also long-term bonds and real estate — may be overpriced. Leaving Bitcoin madness aside, we’re not talking dot-coms in 2000 or houses in 2006. But standard indicators are well above historically normal levels, and a reversion toward those norms could be painful.

About that plummet: If there was any news item behind it, it was Friday’s employment report, which showed a significant although not huge rise in wages. Now, rising wages are a good thing. In fact, the failure of wages to rise much until now has been a deeply frustrating deficiency in the otherwise impressively durable economic recovery that began early in the Obama administration.

But we’re now seeing fairly strong evidence that the U.S. economy is nearing full employment. The low measured unemployment rate is only part of the story. There’s also the growing willingness of workers to quit their jobs, something they don’t do unless they’re confident of finding new employment. And now wages are finally rising, suggesting that workers are gaining bargaining power, too.

Again, this is all good news. But it does mean that future U.S. growth can’t come from putting the unemployed back to work. It has to come either from growth in the pool of potential workers or from rising productivity, that is, more output per worker.

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Did the markets believe Trump? At the very least, they’ve been acting as if the U.S. economy still had lots of room to run; throwing cold water on that belief should mean both higher interest rates and lower stock prices, which is what we’re seeing.

But should we be worried about something worse than a mere downshift in growth? Well, asset prices do look high: A widely used gauge of stock valuations puts them at a 15-year high, while a conceptually similar measure says that housing prices have retraced a bit less than half the rise that culminated in the great housing bust.

Individually, these numbers aren’t that alarming: Stocks, as I said, don’t look nearly as overvalued as they did in 2000, housing not nearly as overvalued as it was in 2006. On the other hand, this time both markets look overvalued at the same time, at least raising the possibility of a double-bubble burst like the one that hit Japan at the end of the 1980s.

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Fed Chairman Jerome ‘Jay’ Powell– How well he would handle a crisis if one developed, asks Dr. Krugman

And if asset prices take a hit, we might expect consumers — who have been spending heavily and saving very little — to pull back. Still, all of this would be manageable if key policymakers could be counted on to act effectively. Which is where I get worried.

It’s surely not a good thing that Trump got rid of one of the most distinguished Federal Reserve chairs in history just before markets started to flash some warning signs. Jerome Powell, Janet Yellen’s replacement, seems like a reasonable guy. But we have no idea how well he would handle a crisis if one developed.

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Secretary of the Treasury–Steven Mnuchin

Meanwhile, the current Secretary of the Treasury — who declared of Davos, “I don’t think it’s a hangout for globalists” — may be the least distinguished, least informed individual ever to hold that position.

So are we heading for trouble? Too soon to tell. But if we are, rest assured that we’ll have the worst possible people on the case.

Image result for Paul KrugmanDr. Paul Krugman

 

Change is afoot at the top of Central Banks


February 5, 2018

THE ECONOMIST

Situations vacant

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

Print edition | Leaders

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.

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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.

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https://www.thebalance.com/what-is-the-central-bank-315194

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

Image result for Thank You Janet YellenThank You, Dr. Janet Yellen for your steady hand as Fed Chairman

 

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”

John Cassidy on Janet Yellen’s Legacy–A Robust US Economy


February 2, 2017

John Cassidy on Janet Yellen’s Legacy–A Robust US Economy

by John Cassidy@www.newyorker.com

 

Dr. Janet Yellen, the Federal Reserve Board chair, is responsible for the economic success that Trump is taking credit for, but her successor will have to make some tricky calls.

During his State of the Union speech, on Tuesday night, Donald Trump took credit for the country’s strong rate of job creation, its rising wages, and the lowest unemployment rate in many years. Meanwhile, Janet Yellen, the person primarily responsible for these things, was preparing to leave her post as the chair of the Federal Reserve Board. On Wednesday, she chaired her final meeting of the central bank’s policy-making arm, and Friday will be her last day at the Fed.

On Monday morning, Jay Powell—a Republican, investment banker, and current member of the Fed’s board—will be sworn in as her successor. In a more just world, Yellen would have been given a second four-year term, as most of her (male) predecessors were. But late last year Trump decided to replace her with Powell.

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Jay Powell– an Investment Bank and Federal Reserve Board Member

Having spent fourteen years at the Fed, and having been the first woman to lead it in its hundred-and-five-year history, Yellen is leaving with a record of high achievement. A fiercely smart academic economist—she holds a Ph.D. from Yale—she served as a loyal and able deputy to her predecessor at the Fed, Ben Bernanke.

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Paul Volcker,  Alan Greenspan, Ben Bernanke and Janet Yellen

Upon taking the top job, she quickly demonstrated a mastery of the communicative and political skills that are necessary to run a large institution like the Fed. In speeches and at press conferences, she explained the Fed’s thinking clearly and carefully, doing her best not to lapse into the technical jargon beloved by economists. Her colleagues liked and respected her, and she charmed some key Republicans on Capitol Hill. (That helped to head off recent calls, emanating from some corners of the G.O.P., for an inquisitional audit of the Fed.)

She even got along well with Trump, a fellow-New York native. (Yellen grew up in Brooklyn.) Last November, when he announced that he would nominate Powell rather than keep Yellen for a second term, he said, “She’s a wonderful woman who’s done a terrific job.” This statement raised the question of why he didn’t leave Yellen in place. It was widely assumed that partisan politics were responsible: Yellen is a Democrat, and Barack Obama nominated her, in 2013. But there’s also another possibility. Trump may believe that, with Yellen out of the way, it will be easier for him to lay claim to some of her achievements.

These achievements include overseeing a historic period of job creation. “Under Yellen, the U.S. unemployment rate has fallen the most of any Fed chair term in modern history,” the Washington Post’s Heather Long pointed out last month.

In February, 2014, when Yellen took office, the unemployment rate was 6.7 per cent; today, it is 4.1 per cent. And almost three quarters of that decline came before Trump entered office.

It should also be noted that, when Yellen took office, most economists believed that an unemployment rate below five per cent, or thereabouts, would lead to inflation. If the unemployment rate fell below a certain key level, the textbooks said, prices would start rising. To head off an inflationary spiral, the Fed would have to step in and raise interest rates sharply—and such a move would risk a recession.

Yellen disputed this mechanistic view. Citing the fact that millions of people had ceased looking for jobs during and after the Great Recession of 2007-2009, she argued that the headline rate of unemployment was an inadequate measure of the state of the labor market, and that other metrics, such as the labor-force-participation rate, also needed to be taken into account.

More controversially, she also argued that there could be important benefits to the Fed running a “high-pressure economy,” in which the unemployment rate was kept low and new hires were hard to find. In such a situation, Yellen speculated, in a 2016 speech, workers who had dropped out of the labor force could be drawn back in, firms could be incentivized to make capital investments, over-all demand in the economy could be higher, and wages and productivity growth—which were languishing badly—could pick up

This argument harkened back to one made during the nineteen-sixties by an earlier generation of Keynesian economists, including James Tobin, Yellen’s thesis supervisor, and Nicholas Kaldor, the British theorist and policy adviser. With the rise of monetarism, new classical macroeconomics, and so-called New Keynesianism, this type of economics fell out of fashion. But, as Yellen perceived, it could perhaps hold the key to breaking the recent pattern of low growth, low rates of capital investment, and stagnant wages.

The experience of the past eight years shows that it took a big dip in the unemployment rate for median household incomes to recover some of the losses they had suffered during the recession. Only when the jobless rate fell below the level previously considered safe did hourly wages rise by more than the inflation rate. Yellen welcomed these developments and sought to extend them rather than choke off growth prematurely. Even now, in the ninth year of the post-2009 economic recovery, the federal funds rate is only 1.5 per cent. The rate of inflation, as indicated by the Fed’s preferred measure, is also just 1.5 per cent—below the Fed’s official target of two per cent.

It could be argued—and it has been argued—that, with such a low inflation rate, the Fed has no business raising rates, even slowly. However, a case can also be made that the Fed’s expansionary policies are responsible for a stock-market boom that is now turning into a bubble. Sensitive to both of these critiques, Yellen’s Fed has been removing the monetary stimulus slowly, in baby steps.

Thanks to Trump and the Republicans, the Fed now faces another challenge, in the form of an additional boost to the economy provided by a front-loaded tax cut. Should the Fed stick to its current policy stance and accommodate this new stimulus? Or should it perhaps accelerate its interest-rate hikes? Yellen won’t have to make that call. The onus will be on Powell, who must be keenly aware that any hint of the Fed adopting a more hawkish approach will bring down upon him a Presidential Twitter fusillade and more—including the possibility of disruptions in the markets. Yellen certainly deserved another term, but she may be getting out at the right time.

John Cassidy has been a staff writer at The New Yorker since 1995. He also writes a column about politics, economics, and more for newyorker.com

https://www.newyorker.com/news/our-columnists/after-four-years-of-high-achievement-janet-yellen-may-be-leaving-the-fed-at-the-right-time?mbid=nl_Daily 020118 Control&CNDID=49438257&spMailingID=12858345&spUserID=MTg4MDU2MzU5MDA5S0&

Trump’s Federal Reserve Nominee Chairman–Jerome Powell


November 3, 2017

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Trump’s Federal Reserve Nominee Chairman–Jerome Powell

by Kenneth Rogoff*

https://www.project-syndicate.org/commentary/jerome-powell-fed-chair-pick-by-kenneth-rogoff

Jerome Powell, US President Donald Trump’s pick to succeed Janet Yellen as Fed Chair, will face some extraordinary challenges at the outset of his five-year term. But the greatest challenge of all will be to stay out of Trump’s shadow and uphold the Fed’s independence.

Image result for Jerome PowellFederal Reserve Chairman Designate Jerome Powell with President Donald J. Trump.

Jerome Powell “is a sane and sober choice that heralds short-term continuity in Fed interest-rate policy, and perhaps a simpler and cleaner approach to regulatory policy.”–Kenneth Rogoff

 

CAMBRIDGE – With the appointment of Jerome Powell as the next Chair of the United States Federal Reserve Board, Donald Trump has made perhaps the most important single decision of his presidency. It is a sane and sober choice that heralds short-term continuity in Fed interest-rate policy, and perhaps a simpler and cleaner approach to regulatory policy.

Although Powell is not a PhD economist like current Fed Chair Janet Yellen and her predecessor, Ben Bernanke, he has used his years as an “ordinary” governor at the Fed to gain a deep knowledge of the key issues he will face. But make no mistake: the institution Powell will now head rules the global financial system. All other central bankers, finance ministers, and even presidents run a distant second.

If that seems hyperbolic, it is only because most of us don’t really pay attention to the Fed on a day-to-day basis. When the Fed gets it right, price stability reigns, unemployment remains low, and output hums along. But “getting it right” is not always easy, and when the Fed gets it wrong, the results can be pretty ugly.

Famously, the Fed’s efforts to tame a stock-market bubble in the late 1920s sparked the Great Depression of the 1930s. (Fortunately, of the candidates Trump was considering for the Fed post, Powell is the one least likely to repeat this mistake.) And when the Fed printed mountains of money in the 1970s to try to dull the pain of that decade’s oil shocks, it triggered an inflationary surge that took more than a decade to tame.

At times, the rest of the world seems to care more about Fed policy than Americans do. Little wonder: perhaps more than ever, the US dollar lies at the heart of the global financial system. This is partly because much of world trade and finance is indexed to the dollar, leading many countries to try to mimic Fed policies to stabilize their exchange rates.

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Thank You, Dr. Janet Yellen for Your Service to the International Financial Community

Powell will face some extraordinary challenges at the outset of his five-year term. By some measures, stock markets look even frothier today than they did in the 1920s. With today’s extraordinarily low interest rates, investors seem ever more willing to assume greater risk in search of return.

At the same time, despite a strongly growing US and global economy, inflation remains mystifyingly low. This has made it extremely difficult for the Fed to normalize policy interest rates (still only 1%) so that it has room to cut them when the next recession hits, which it inevitably will. (The odds of a recession hitting in any given year are around 17%, and that seems like a good guess now.)

If Powell and the Fed cannot normalize interest rates before the next recession, what will they do? Yellen insists that there is nothing to worry about; the Fed has everything under control, because it can turn to alternative instruments. But many economists have come to believe that much of this is smoke and mirrors.

For example, so-called quantitative easing involves having the Fed issue short-term debt to buy up long-term government debt. But the US Treasury owns the Fed, and can carry out such debt purchases perfectly well by itself.

Some argue for “helicopter money,” whereby the Fed prints money and hands it out. But this, too, is smoke and mirrors. The Fed has neither the legal authority nor the political mandate to run fiscal policy; if it tries to do so, it runs the risk of forever losing its independence.

Given that monetary policy is the first and best line of defense against a recession, an urgent task for the new chair is to develop a better approach. Fortunately, good ideas exist, and one can only hope that Powell will quickly move to create a committee to study long-term fixes.

One idea is to raise the Fed’s inflation target. But this would be problematic, not least because it would breach a decades-long promise to keep inflation around 2%. Moreover, higher inflation would induce greater indexation, ultimately undermining the effectiveness of monetary policy. Paving the way for effective negative-interest-rate policy is a more radical – but by far the more elegant – solution.

Bank regulation is also part of the Fed’s mandate. The 2010 Dodd-Frank financial-reform legislation, which has spawned 30,000 pages of rules, has been a boon for lawyers. But the massive compliance costs ultimately fall on small and medium-size businesses. It would be far better simply to require banks to raise much more of their resources in equity markets instead of through bonds. That way, shareholders, not taxpayers, would take the big hit in a crisis.

I have not mentioned the elephant in the room: the threat to the Fed’s independence posed by a president seemingly intent on challenging all institutional norms. When President Richard Nixon was intent on being re-elected in 1972, he put heavy pressure on then-Fed Chair Arthur Burns to “juice” the economy. Nixon was re-elected, but inflation soared and growth collapsed. No one should be wishing for a replay – even if Nixon eventually was impeached.

*Dr. Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. The co-author of This Time is Different: Eight Centuries of Financial Folly, his new book, The Curse of Cash, was released in August 2016.