Central Banks Did Some Hiring on Tuesday

The central banking world got a jolt of excitement Tuesday, when EU leaders nominated IMF chief Christine Lagarde to head the ECB for the next eight years and President Trump announced (on Twitter, natch) he will nominate economists Judy Shelton and Christopher Waller to fill the two remaining Fed board seats. Because the world is oddly obsessed with central bankers these days, pundits have already started spilling many words and pixels speculating over what these appointments mean for global markets and economies. We recommend you tune it all out. Central bankers’ actions are unpredictable, and a few new faces probably won’t have much influence on these consensus-obsessed institutions.

We will concede that Lagarde is a curious choice to be ECB president, given she has no central banking experience—or any banking experience. However, to presume experience is important is to presume the ECB’s chief dictates monetary policy. In reality, the entire ECB policymaking cabal votes, and that group contains the ECB president, five board members and every eurozone nation’s central bank chief—a 25-person committee. As a result, the ECB president’s role is largely political. They present decisions to the world, handle the press and conduct diplomacy during a crisis. In that vein, Lagarde’s tenure at the IMF becomes très relevant, as she helped orchestrate several bailouts during the eurozone’s debt crisis. She is also widely respected among European leaders, which should help preserve strong diplomatic relations with other eurozone institutions. 

This is a big reason why we think it is rather useless to speculate on what her appointment will mean for monetary policy. We wouldn’t bother parsing her past speeches for references to ECB decisions. Nor would we recommend pulling up the IMF’s recent World Economic Outlooks and searching for “stimulus.” Not only do central bankers have a way of forgetting past viewpoints once in office, but it seems reasonable to expect her to delegate much of the monetary policymaking to trusted deputies on the ECB board and then use her position to build consensus. It is the sort of thing a skilled political leader would do. We could be wrong! She could march in there and make fiery interest rate recommendations or refute all of history and decide the ECB won’t be the lender of last resort for the eurozone! But it would be a little bit weird.

As for the fresh Fed faces, you might read that Shelton is a gold bug who wants to cut interest rates to zero or that Waller is a smart cookie who looks at the yield curve—which, it’s about time someone at the Fed did. But alas, we doubt any of these factoids will much sway Fed decision making. For one, we aren’t going back on the gold standard any time soon. Those days are gone. Moreover, the gold standard is one of the most misunderstood economic issues of modern times. People call it a dollar stabilizer, but in reality it is simply an arbitrary price control on a yellow metal. It works the same way other price controls do: It gets changed periodically when the situation requires it. Beyond that, having one person who once spoke warmly of the gold standard on the Fed’s board just means one person on 12-person decision-making committee maybe yammering about gold when it is her turn to speak. Maybe. Ditto for her views on rate cuts, which may have been an audition for a president who wants to cut rates, not her actual policy preferences. Even if the sentiment was genuine, no matter how much any one Fed person wants to cut or raise interest rates, that pesky voting committee thing gets in the way. Similarly, if Waller is the only one in the room discussing the yield curve and warning of the dangers of inversion, it won’t do much good.

About the only thing Tuesday’s appointments do is clear up some microscopic level of uncertainty. That is a tiny positive, we guess, though we suspect people weren’t exactly delaying major investment decisions while waiting to see who would get hired. Clarity is always nice, but we wouldn’t overstate the matter and don’t figure a few central bank appointments (subject to confirmation) are all that meaningful for global stocks. In other words, pundits can put the planned 2,500 word bios on ice, in our view.