Sintra, or how difficult it is to be a central banker in times of populism | Financial Markets

Central bankers are not very fond of interfering in politics, although some of the most prominent ones (Christine Lagarde, Mario Draghi, Janet Yellen or Paul Volcker) have used the revolving doors. This year, despite everything, politicians have planned more than ever for the annual forum in Sintra. The highlight of the meeting…

Central bankers are not very fond of interfering in politics, although some of the most prominent ones (Christine Lagarde, Mario Draghi, Janet Yellen or Paul Volcker) have used the revolving door. This year, despite everything, politicians planned more than ever for the annual forum in Sintra. The highlight of the meeting was a roundtable between Christine Lagarde, the ECB president, Jerome Powell, the Fed president and Roberto Campos Neto, the governor of the Central Bank of Brazil, which took place less than 24 hours after the end of the first round of French legislative elections and four days after the debate between Joe Biden and Donald Trump.

Lagarde is facing a major force in her home country that opposes European integration, the rise of which has put markets on edge about the risk of a repeat of the 2012 eurozone debt crisis. Powell has her own problems, as she is in Donald Trump’s headquarters. Ways to tighten White House control over the Federal Reserve have been considered. Trump has threatened to fire Powell in 2018 and has vowed not to renew it. Analysts have openly noted that, given the volcanic political landscape in the US, the Fed president will find it difficult to move rates on dates close to November 9.

Well-behaved and well-trained central bankers systematically ignore policy. But the job is becoming increasingly difficult as politics and rising populism infiltrate the spreadsheets of monetary authorities. Lagarde has had to face the question of what she will do to avoid a market crash as a result of a possible far-right victory. “Thank you very much for asking,” he said wryly, as Powell smiled. The ECB already has (unlike in 2012) the weapons to contain the market deterioration that is fragmenting the eurozone. But it will also have to calibrate how closely the possible dispersion of risk premiums is aligned with fundamentals, and at what level the eurozone would be in danger.

It’s a diabolical situation: central banks must publicly ignore one of the factors that most determines their policies and the exercise of their powers. “We have a huge responsibility, and it’s important that we do it well,” Powell said. “We’ve been told to stay out of politics and do our job,” he concluded.

Beyond this big elephant in the room, the Sintra forum also recorded a paradigm shift: central bankers are saying goodbye to expectations management (the famous advanced leadership) and welcome the football cliche “match after match”. This is nothing new; the economic environment has changed radically, first because of the pandemic and then because of inflation, and the toolbox for stabilizing the economy may not be the same. “Faced with multiple large-scale shocks, there has been great uncertainty about how to interpret and classify the information we have been receiving from the economy,” Lagarde said in her keynote speech on Monday. “On the one hand, it would be risky to rely too much on models formed on the basis of historical data, since these data may no longer be reliable. On the other hand, relying too much on current data could be misleading if they prove to be of little use in the medium term.”

The ECB president said eurozone inflation was heading in the right direction, but he warned again about wage evolution and stressed the need for asymmetric policies to nip in the bud any doubts about the commitment to price increases. In translation, the market may be right to expect two rate cuts in the rest of the year (excluding July, probably September and December), but the rate trajectory is not predetermined, as it is in the world before 2020.

This is, broadly speaking, the same approach that the BIS outlined in its annual report, presented just a week ago. There, it pointed to the possibility of central banks raising rates in extreme cases if inflation proves “stubborn.” Flexibility and reliance on macroeconomic data is the new mantra of monetary policy, a shift in priorities driven by extreme economic events, but which also empowers central bankers, whose work is always driven by policy, but now to an unknown level. The ECB hit the nail on the head with its choice of conference title: “Monetary Policy in an Era of Transformation.”

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