The risk of politicization of central banks

Donald Trump's intentions to nominate Stephen Moore and Herman Cain as presidents to the Federal Reserve raises worries about central bank integrity. And in the coming months, the US economy is expected to slow down as analysts start wondering if the escalation of events will not hinder the bank's operation.

Not only is the policy intervention in monetary policy likely to lead to high levels of inflation and unemployment, but it can also limit the ability of legislators to cope in case of a difficult economic situation. Raising interest rates can prevent the economy from overheating, as their pruning can lead to stimulating economic activity.

"If there is a recession next year, we will have less" ammunition "than other central banks," said Ryan Sweet, an economist at Moody's Analytics.

Of course, Moore and Cain would not be able to exercise their monetary policy, even if that was confirmed by the US Senate. In total, there are 12 members of the Federal Open Market Committee who vote on interest rates.

Central banks, however, have a key role to play in shaping key economic expectations, particularly in the face of uncertainty that is bordering on recession. The consensus gives a clear signal to businesses and consumers.

Economists worry that the politicized Fed may take external pressure to reject the current regulatory measures. It was after the financial crisis ended ten years ago that the Fed launched a number of regulations that were designed to minimize risk and protect consumers.

"To avoid an economic collapse like 2008, you need to have a person who is focused on systemic risk and who has the political courage to take the necessary measures before the inevitable happens." - says Alice Rivlin, former Vice President of the Fed. "They have the ability to raise capital requirements, which is, in principle, a very unpopular measure of action, and politicians will use this to help their bankers."

Trump's intentions raise doubts that Trump's nominations will have the necessary skills to properly target the Federal Reserve. They need to convince others that they have knowledge of the financial system, monetary policy, or other aspects of the FED's work. People worry that they will face a situation like 2008 or similar. And worries are further exacerbated when people who have no knowledge to face future challenges are on the scene.

Source: Business Insider 

Read more:

• Risk off after the escalation in the Middle East, markets are recovering in a period of calm
• The macroeconomic events for today’s trading calendar
• The US government has confirmed the attacks, Trump is calling an emergency staff meeting
• Has the war between Iran and the US started?
• US markets remain under pressure, traders await Iran’s response