By Nicole Zhu
Abroad and in the United States, policymakers are increasingly asking more of other governmental institutions besides just the legislatures. Now, however, economists and lawmakers are asking: what is the role of a central bank in shaping economic policy?
Stateside, the Federal Reserve—a historically proactive institution that makes adjustments to interest rates before anticipated economic changes—has now adopted a more reactive approach. Under the leadership of Jerome Powell, who was nominated to the position by President Trump, the Fed lowered interest rates three times over the course of six months to help cushion the economic blowback from Trump’s trade war. In the Fed’s most recent news conference, however, Powell announced that the central bank would not be reducing rates for the foreseeable future—and beyond that, depending on economic forecasts—against the wishes of the president, who has advocated loudly for rates to go to zero or even lower.
Ironically, Trump’s call for rates of “ZERO, or less” places the president squarely in line with European Central Bank President Christine Lagarde, who has advocated for negative interest rates as a tool to stimulate economic growth. Switzerland, among other nations, has already begun utilizing the unorthodox method.
A research paper recently released by the Peterson Institute for International Economics advocates for similar utilization of monetary policy to influence wider policy: in this case, the paper called for central banks to purchase fewer bonds from carbon-intensive firms as a way to reduce climate-change risk. Although the Federal Reserve is restricted by law to the type of securities it can purchase, it is worth noting that the American central bank is the only among its peers worldwide not part of the Network for Greening the Financial System, an organization dedicated to strengthening the financial system against climate change risks.
However, both Trump and Lagarde diverge over Trump’s implication that central banks ought to play a larger role in influencing economic policy: Lagarde, by contrast, urged nations to rely on structural change and fiscal policy in order to stabilize economies and stimulate growth, not monetary policy by central banks. Whether or not officials at central banks, who usually act with more discretion than most branches of government, will oblige is yet to be seen.