Central Bank Autonomy is Critical for Ensuring Healthy Economies and Financial Markets

A recent study published in the Harvard Business Review by Roberto Stefan Foa and Rachel Kleinfeld states that “far from growing private-sector wealth, we find that equity returns under right-wing populists often prove dismal.” More specifically they “underperform benchmarks by around a quarter during a first term in office, and by half after a decade.” This is because right-wing populists typically undermine the rule of law and meddle in markets (e.g. Trump’s tariffs).  Nobel Prize winning economists Acemoglu, Johnson and Robinson also demonstrated in “Why Nations Fail,” that authoritarian assaults on institutions are associated with lower growth.

President Donald Trump visited the Washington DC headquarters of the US Federal Reserve (the US’ central bank, known as the Fed) on July 25 as tensions continued to escalate between his Administration and the independent overseer of the US’ monetary policy, whose conduct has significant implications for the rest of the world as well as the US dollar’s (USD’s) future as the world’s reserve currency. This visit came in a context where Trump has repeatedly demanded that Fed Chair Jerome Powell cut US interest rates to close to zero and insisted that inflation will not rise. He has also frequently raised the possibility of firing the Fed Chair (although he then rolls this threat back). He has also repeatedly used highly objectionable language against him. One of the latest slurs directly aimed at Powell by the US President was “numbskull” for Powell’s unwillingness to cut the Fed’s interest rates while, after threatening to fire him recently, the latest timeframe he has given Powell to stay at the Fed is eight months. This is even though the Fed Chair’s current four-year term does not end till May 2026, and his Fed Board term does not expire till 2028. 

You may read evaluation note from here.