What a ‘Trumpified’ US Federal Reserve means for Asia
The rising odds that Donald Trump will yell: “You’re fired!” at Janet Yellen should worry Asian leaders, businesspeople and investors alike.
The US central bank is, for better or worse, the world’s. The Fed system has 12 districts, but the last 20 years effectively made Asia its 13th ward, Latin America the 14th, Russia the 15th, and so on. Mexico learned the devastating power of Fed rate hikes in 1994. East Asia experienced it in 1997. India felt it along with Turkey, Brazil and South Africa in 2013 at the mere hint of the Fed tightening the screws.
Obviously, Asia wants whoever might succeed Fed chair Yellen to get things as right as often as humanly possible. Yet Trump’s “America First” ethos could unnerve markets as the reality-show president auditions contestants like some garish monetary beauty contest. More importantly, asks Nobel laureate Paul Krugman, what happens if the president wrecks the global economy’s most powerful financial institution?
The mere fact that Trump would meddle with Fed leadership is senseless trolling. I’ve interviewed Yellen more than a dozen times over the years and she’s as smart, talented and dedicated an economist as you’ll find. We Americans are blessed to have her hands on the reins. Curious, humble and open-minded, she’s the full package that commonly mentioned Trump candidates aren’t. That validates Krugman’s fear that Trump will dump Yellen just because he can.
Trump has “been like a Category 5 hurricane sweeping through the US government, leaving devastation in his wake”, Krugman writes in The New York Times. “And one question I don’t see being asked often enough is, will the same thing happen to the Federal Reserve? And if it does, how disastrous will that end up being for the world economy?”
Krugman seems particularly concerned about Kevin Warsh, an inflation-phobe in a deflationary age, replacing Yellen. Might he, blinded by ideological viewpoints, overtighten to Asia’s detriment? Jerome Powell, another frontrunner, shares Trump’s magical thinking about faster US growth solving problems more than structural upgrades. Columbia’s Glenn Hubbard? Heaven help us if a top advisor to President George W. Bush gets to call the shots on credit. Nor does the idea of a Fed run by Trump enabler Gary Cohn offer much comfort.
Stanford’s John Taylor, another member of the Bush brain-trust, often gets mentioned. That was questionable even before he penned a strange article with US House speaker Paul Ryan, who gets his economics from Ayn Rand novels, suggesting Yellen kept rates low to help Barack Obama’s presidency. Then again, maybe Trump will just replace Yellen with one of his kids.
American missteps go global in a hurry. Look no further than how quickly the protector of the reserve currency shoulder-checked markets in 2008. Imagine if a more ideologically rigid Fed leader had been in charge back then. Yellen’s predecessor, Ben Bernanke, got major grief for following Japan down the quantitative-easing rabbit hole. But his aggressive moves, in the face of Congressional dysfunction, saved the US from a near-death experience.
China might not have stood its ground if the Bernanke Fed didn’t stabilize world markets. Japan probably wouldn’t have avoided the worst of the “Lehman shock” if Bernanke hadn’t restored confidence in banks. What if in August 2013, for example, Raghuram Rajan acted the way Economics 101 textbooks dictated and declined to improvise? India might’ve been downgraded, unleashing fresh waves of market chaos and making today’s 7% growth unthinkable.
Trump’s economic roster is already heavy with B-team players—A-listers knew better than to come aboard. Thankfully, there’s only so much damage (hopefully) that film-producer-turned treasury secretary Steven Mnuchin can do. Come on Congressional checks and balances, save us from a man who thought making Suicide Squad and The LEGO Batman Movie were good ideas! The Fed, though, is a very different animal. More independent, more deliberative, more immediately impactful.
That’s just what worries economists like Krugman. “Surely it’s possible, even probable, that the Federal Reserve, like other government agencies, is about to get Trumpified, that one of American policy’s last remaining havens of competence and expertise will soon share in the general degradation,” Krugman says. “And won’t that be fun when the next crisis hits?”
It’s a question India’s Narendra Modi, Japan’s Shinzo Abe and China’s Xi Jinping should be asking early and often. The Economist picking Xi as the “world’s most powerful man” in its latest issue surely ruined Trump’s day. But Xi will only be as powerful as the global economy into which China sells manufactured goods and imports technological ideas. Xi also owes Yellen. In 2015, the Fed took Shanghai’s crashing stock market into account. It delayed a rate hike, taking pressure off Xi’s team.
Trump has already hobbled America’s diplomacy, environmental leadership and health care services. The Fed could be next, making the global financial system a more dangerous place. That risk should have Asia, the Fed’s 13th district, all fired up and battening down the hatches.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek