George Soros’ speech at the Festival of Economics (which I tweeted about earlier) has got me thinking again about the political problems that policymakers today face as they see potential crises pop up around them. The ECB has been especially inactive after LTRO last winter despite a glaringly dire problem in the Eurozone. The Fed has also been quiet despite lower than 2% inflation (which generally has been treated more as a ceiling than a target recently), poor May numbers and downwardly adjusted April numbers (although in fairness, the Fed has not had much time since that news broke), and growing concerns of a European or Chinese disaster that could spill over.
How much of this can be attributed to political issues? Or, as Soros might put it, how much of this is central bankers getting swept into the political bubble (especially with the ECB)?
I think in the case of the ECB, a large part of the reluctance to act is due to Germany’s reluctance to act. ECB leaders have been able to hide behind their inflation mandate, which they can likely use in the future to defend themselves for not taking further action. Today’s comments by Draghi following the ECB’s meeting enforced that the central bank will not take greater actions right now. Draghi did say that some members of the Governing Council pushed for a rate cut, but that is far too little, far too late- as most ECB actions have been for most of this crisis.
The Fed finds itself in a situation where perhaps the need to act is less apparent than in Europe (and hence the counterpoint more arguable), but still quite strong. The American central bank finds itself looking at a political leadership in Washington that still does not have faith in monetary stimulus. And that goes for both sides of the aisle. Furthermore, there have been threats, especially from some Republicans, of further regulating the Fed due to policy actions taken in the past couple years. Those threats will probably (hopefully?) not come to fruition, but Federal Reserve officials have to have it in the back of their minds, especially as they face the question of whether or not to take more politically controversial policy actions.
It is also possible that my speculation on politics interfering with the Fed is completely off and the optimism in today’s Beige Book update was genuine. I hope so (and more so, I hope the market buys it).