ALEX BRUMMER: Central banks get it wrong in populism fight

The Western economic establishment’s fightback against populism and fears that Donald Trump is seeking to seize control of America’s central bank is impressive.

Robust central banks act as guardians against international volatility as well as bulwarks against inflation and the monetisation of government debt.

Currency swaps among G7 central banks are a key feature of global financial architecture and were used to good effect in the 2008 financial crisis, at the start of the Covid shutdowns in March 2020 and during subsequent milder storms.

Trumped-up criminal charges against Fed chair Jay Powell and the Federal Reserve must be resisted, as should attempts to pack the Fed with White House apologists.

Fed governors (other than those from the regional Federal Reserve banks) are appointed for 14 years precisely to guard against political interference. Leadership of central banks, and at the International Monetary Fund (IMF), should not be viewed through rose-tinted glasses. Mistakes have been made during a period of geopolitical and economic instability.

Several of those rushing to the defence of the Fed have political form of their own. Ganging up to save the Fed in favour of monetary independence is a political act.

A speech by Bank of England governor Andrew Bailey to the obscure Bellagio Group, a collection of central bankers and elite economists, offered a critique of populism. No one wants to see a return to the fascism of the 1930s.

But not all populist ideas are verboten. Italian prime minister Giorgia Meloni has brought greater calm to the nation’s politics and fiscal management, which had been lacking for most of the post‑war era. In Argentina, president Javier Milei has taken a meat axe to government spending and brought inflation down rapidly.

Here in the UK, Reform questions whether the Bank of England should be paying bank rate on overnight deposits by commercial banks. High Street customers receive returns which rarely match inflation.

The record of those rushing to defend the Fed needs to be probed. IMF managing director Kristalina Georgieva argues that central bank independence works in the interests of business and consumers. In her previous role at the World Bank, she allegedly placed ‘undue pressure’ on staff to give a more favourable view of the Chinese economy. European Central Bank (ECB) president Christine Lagarde served as finance minister in Nicolas Sarkozy’s flawed French government. In 2016 she was found by a court to have been negligent in handling state funds. There was no sentence, and she kept her job as the IMF’s boss before being parachuted to the ECB in 2019.

Jay Powell’s integrity is being unfairly challenged. The real charge against him and Bailey is that they called inflation wrong. Former Bank chief economist Andy Haldane warned in the Daily Mail in May 2021 that the inflation genie was out of the bottle. Despite this, the Bank chose to hold rates low and carried on with quantitative easing, delivering a cost of living shock which still lingers.

Central bankers do make terrible mistakes. But Trump’s crude use of language and the weaponisation of building costs at the Fed are despicable and disrespectful.

However, the holier-than-thou support from other central banks and the IMF is hypocritical and counter-productive given their own flawed records.