Trump's war on the Fed: Why did US financial markets shrug it off?

They can be myopic but it’s the responsibility of others to peer into the future and assess the economic damage that’s likely

- BARRY EICHENGREEN

While President Donald Trump’s attack on the US Federal Reserve Board and on a sitting governor, Lisa Cook, has elicited expressions of high alarm from economists and commentators, investors have responded with one big yawn.

This might seem like a dramatic disconnect. Actually, however, the two groups have good reasons for responding differently.

Commentators concerned with the stability and integrity of US monetary policy have every reason to be horrified by Trump’s attempt to ‘fire’ Cook nearly 13 years before the expiry of her term. (Full disclosure: I directed Cook's Ph.D. dissertation at the University of California, Berkeley.) Members of the Board of Governors are appointed to long terms in office precisely to insulate them from political pressure.

Few laws of economics are better established than the proposition that central banks that are independent from politics do a better job of implementing monetary policy. They deliver lower and more stable inflation without visible costs in terms of higher and more variable unemployment.

There are also abundant counterexamples, mainly but not exclusively from emerging markets, where a political leader appoints a flunkey to lead the central bank, and the appointed flunkey then bows to the leader's whims. As a general rule, these episodes turn out poorly. Politicians care about the next election or public-opinion poll, and, given the power they can exercise, often try to manipulate monetary policy with such short-term goals in mind.