In the dialectical confrontation between governments and central banks, boring foil shots have given way to slaps. On both sides of the Atlantic. And with an exchange of roles between the two ocean shores: in the US the central banker is the one who is slapped mind in the Eurozone is the slapper.
The tension between the two main players in economic policy has been high for some time. Very high in Washington. A little less between Frankfurt and the capitals of the 19 countries that share the single currency. However, in the last week a curious curtain was aired.
The exuberant Trump tweeted again: «Our problem is not China but the Fed!», "People are very unhappy with Jay Powell and the Fed." Just before the summer he had been even tougher and about the Fed Chairman he had tweeted: «He does a bad job. I have the right to cut his salary. I have the right to fire him."
Powell has never turned the other cheek, but his answers have always been indirect and mostly aimed at defending the institution. Like on Wednesday 30 October, when, at the start of the press conference to explain the reasons for the last rate cut of 2019, he read a text shared by the entire board of directors: “My colleagues and I are dedicated to serving the American people. We do this by firmly pursuing the objectives that Congress has assigned us: maximum occupancy and stable prices. We are committed to making the best decisions possible, based on facts and objective analysis."
This side of the ocean and on the same day, Christine Lagarde, interviewed by a French broadcaster, spoke unusually. The new President of the ECB didn't just generically say that countries with room for maneuver in the public budget must use it, a position supported since August 2014 by her predecessor, Mario Draghi. But you mentioned names and surnames: Germany and the Netherlands. Never before had individual countries been pointed out so explicitly.
Although they are not frequent, clashes and tug of war between the elected rulers and the elite guardians of the coin there always have been. In the past they have also resulted in sensational resignations (of the latter, not of the former). After all, they are part of the normal dialectic between institutions within a sanctioned division of roles and powers. Today, however, they have become commonplace and are happening more and more publicly.
The fundamental reason for this is that economic policy fails to achieve the expected results in boosting growth and ensuring price stability. Growth always seems to stop there and prices dance perilously on the edge of deflation. It is true that the American expansion has reached its eleventh year and is the longest since the war, but it is also by far the least intense. While in the Eurozone the current slowdown is widening and intensifying and there are those who are starting to think that 2020 could be worse than 2019; with inflation nailed to around 1%.
The distance between the results and the objectives has led to two opposing reactions in the makers of economic policy. On the one hand, the central banks have dared and they dare a lot in innovating their action. And they continue to search for both new tools and the best way to communicate decisions and intentions to guide expectations. On the other, governments have introduced measures that have skyrocketed political risk and created a blanket of uncertainty thick enough to curb investment.
It is inevitable that these different behaviors, and the logics that inspire them, bring central banks and governments on a collision course. In a basic scenario that is not destined to change substantially: growth will remain weak, inflation low or non-existent, and citizen-voters dissatisfied and attracted by populist sirens.
