The world’s financial overlords are finally facing the music – The Telegraph

For too long, the political class has hung back in deference to central banks
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So there we have it. According to US congresswoman Lauren Boebert: “Wall Street is full of communists, selling their stocks to hurt President Trump.”
One can think of many derogatory things to say about Wall Street, but to characterise this temple of mammon as filled with communists must be a first.
Her remarks are somewhat similar to what was said by some allies of Liz Truss, the former UK prime minister, when markets forced her out of office.
Supporters claimed that she had been ambushed by “woke” market traders. An establishment cabal of Bank of England and Treasury types was said to have been out to get her all along.
Similar paranoia now grips the White House as it seeks scapegoats for the market turmoil it has inflicted on itself. Chief among the imagined conspirators is Jerome Powell, chairman of the US Federal Reserve.
Trump would gladly get rid of him if he could, even though in apparent recognition of the damage his attacks have done, he now denies any such intention.
Do try to keep up. Trump has also changed his position on his trade war with China only days after briefing that the whole purpose of his tariff policies was to isolate China. But now he plans to be “nice” to Beijing. Who knows what the next 24 hours will bring?
It’s chaos. The US president only has himself to blame both for the slowing economy and the sell-off in markets.
It’s textbook stuff, and Trump has just delivered a master class in how not to do it; if you plan to do radical things, you need to tread carefully and methodically in a consistent manner which takes markets with you.
To simply plunge in fists flying is nearly always doomed to fail, if only because financial markets – always a fragile and complex construct of positions, assumptions and conventions – find it hard to adjust to rapid change without a serious bout of indigestion.
I’m in Washington this week for the spring meetings of the International Monetary Fund (IMF) and the World Bank, where there has been almost universal frothing at the mouth over Trump’s attacks on Powell.
Pierre-Olivier Gourinchas, the IMF’s chief economist, warned that the independence of central banks must be preserved at virtually all costs if financial stability is to be maintained.
“Central banks need to remain credible,” he said, “and part of credibility is built on central bank independence”.
Fair enough, but it is not as if these overlords of the financial system have done much in recent decades to deserve the “credibility” they supposedly possess.
Rather, the reverse: despite their financial stability mandates, they failed to see the financial crisis coming, and then in an attempt to mitigate the consequences engaged in trillions of dollars of quantitative easing that left a devastating legacy of excessive debt, ballooning fiscal deficits and inflated asset prices.
Unforgivably, they also failed to see post-Covid inflation coming, and even when it could no longer be ignored, almost universally described it as “transitory”, a groupthink for which there has been no apology, still less any sign of a resignation.
In Britain, there was at least a formal review of what went wrong, led by the former Fed chairman, Ben Bernanke. But it ended up essentially a whitewash which blamed faulty, out-of-date modelling rather than the judgment of policymakers.
The Fed and the European Central Bank didn’t even bother with that, instead opting for less formal retrospectives that came to much the same conclusions.
No democratically elected politician could hope for the same immunity from responsibility and public scrutiny that central banks enjoy. If they find their independence under attack, they only have themselves to blame.
Given the record, who’s to say that Powell is any better than Trump when it comes to setting interest rates? I’m not suggesting that stripping the Fed of its independence is the way to go: to do so would undoubtedly turn the recent sell-off in US assets into a full-blown, force 10, financial crisis.
Though she toyed with the idea, not even Truss – who was about as bonkers as they come on such matters – went that far. Likewise, Trump has been persuaded to step back from the brink.
This was wise, but that doesn’t mean Trump is wrong to question the Fed’s judgment and powers.
The same goes for what Scott Bessent, Trump’s Treasury secretary, had to say about the IMF and World Bank in Washington on Wednesday. His attack on these institutions as having strayed from their core mission was long overdue, and it was a breath of fresh air to hear a leading politician finally say so.
For too long, the political class has hung back in deference to institutions that these days seem more concerned with worthy climate change and social inequality goals than their original purpose of supporting a balanced and stable global economy.
At just 1pc of global GDP, the IMF was surprisingly modest in its estimate this week of the direct economic costs of Trump’s tariff wars, and didn’t think they would tip either the US economy or the world economy as a whole into recession.
No prizes for guessing why it would want to pull its punches. After Bessent’s speech, it must know that what Bessent called the “mission creep” of today’s institutional status quo is no longer sustainable.
In any case, it is being far too optimistic. If the US economy isn’t already in recession, it soon will be, and if that’s the case then absolutely the Fed should be cutting interest rates. Cratering demand would soon take the pressure off inflation, tariffs or no tariffs.
“Too slow, too late” has a ring of truth about it. Instructed by an abundance of caution, central banks are invariably behind the curve.
Nor is paranoia about an establishment stitch-up entirely without foundation.
Michelle Bowman, a Trump appointee to the Fed, is said to have found herself repeatedly cold-shouldered by Powell and even excluded from key policy meetings. Recently nominated to the Fed’s top job overseeing banks, she has also met stiff resistance to a more industry-friendly approach to financial regulation.
In a similar vein, Bessent has expressed growing concern over internationally set bank capital requirements. To his mind, the US should not be outsourcing key decisions affecting the provision of credit to unaccountable multilateral organisations such as the Basel Committee on Banking Supervision. America should be setting its own rules in pursuit of its own goals, he insists.
After a couple of weeks of mayhem, Trump seems to be rowing back from some of his more extreme positions. All part of the plan, we’re told; escalation to de-escalate.
The more likely explanation, however, is those dastardly “communists” who have come to dominate the financial markets. But that doesn’t mean he’s not got a point.
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