Appointments of central bank heads brings heightened media attention. Speculation is rife when the appointed central banker is that of either a leading nation or is a leading economist. We have had two such appointments recently. First, Kevin Warsh was appointed as chairperson of the Federal Reserve, the leading central bank of the world. Second leading economist Hyun-Song Shin was appointed as governor of Bank of Korea (South).
First, let us review the appointment of Warsh. Appointments of the Fed chair have been under much controversy for both of President Donald Trump’s terms. In his first term, Trump was gunning for re-election and like most politicians, blamed higher interest rates as a hindrance. As then chair Janet Yellen’s four-year term was ending in 2018, Trump appointed Jerome Powell as the new chair. In his second presidency, Trump hoped for higher growth to appeal to his MAGA (Make America Great Again) supporters. He again blamed the Fed, and ironically, Powell, for higher interest rates. As Powell’s term was ending this year, Trump pushed for Warsh’s appointment. He is not new to the Fed,as he was a member of the Fed Board from 2006-11.
The recent rifts between the White House and the Federal Reserve have reignited the debate on central bank independence. The Fed has been ranked high on central bank independence and it is quite shocking how the recent events have raised questions on its autonomy. Recently, central bankers and monetary policy researchers have spoken extensively on the merits of central bank independence, particularly of the Fed.
Warsh assumed responsibility of the chair under these really trying circumstances. If one adds the muddled monetary policy since the 2008 global financial crisis, Warsh’s problems increase manifold. The Fed’s policies have been widely criticised following the 2008 crisis and Covid-19. In both the crises, the central bank followed an ultra-easy monetary policy, stoking financial bubbles and inflation. As inflation started increasing in 2022, the central bank delayed withdrawal of these policies, leading to inflation levels last seen 40 years ago. The sudden high interest rates, in turn, led to the collapse of three major regional banks, causing a second major banking crisis within the last 15 years.
Given these multiple events, there was much attention on Warsh’s first Federal Open Market Committee (FOMC) in June. It was to be seen whether he would cut policy rates and please the political authorities. Surprisingly, he kept the rates unchanged, emphasising that bringing inflation within the 2% target was the central bank’s priority. He also made some interesting changes in the FOMC statement, making it shorter, and also excluded forward guidance and individual votes. Additionally, he announced the setting up of five task forces to improve the conduct of monetary policy — communications, balance sheet, usage of existing data sources, productivity in an era of transformation, and the Fed’s inflation frameworks.
Needless to say, Warsh has started his tenure in trying times and the markets will keenly watch how his policies will pan out.
Let us now shift our attention 11,000 km away, to South Korea. The appointment of the Bank of Korea governor barely raises any eyebrows. However, as Hyun-Song Shin is a highly acclaimed economist, it did merit attention. Shin has been a professor at Princeton University and has served in multiple policy roles, the last one being chief economist at Bank for International Settlements (BIS). At BIS, he shepherded pioneering research on monetary systems and digital currencies.
He takes over the governorship when the South Korean economy is facing serious structural issues. The government imposed martial law, which caused deep political unrest. The country is facing a demographic crisis with a rapidly ageing population and low fertility rates. The export-oriented economy is facing headwinds from worsening geopolitics and geoeconomic fragmentation. It is also facing significant rise in housing prices and household debt.
In his opening address, Shin outlined four goals for his four-year term. The first was the need to maintain focus on price stability in times of supply shocks. Second, as financial boundaries have blurred between domestic and global and banks and non-banks, the policies will need to adapt to this dynamic reality. Third, the central bank must preserve trust in money and payment systems in today’s globalised and digitalised financial system and must take steps to internationalise the Korean won, as well as expand the footprint of its digital currency. Fourth, the central bank will continue to play an active role in resolving structural issues facing the economy.
Warsh and Shin’s appointments may have come in very different circumstances, but their challenges are similar. The US economy has been seen as the global benchmark for nearly a century. Leading economics textbooks often discuss how South Korea managed to catch up with the US per capita income levels after years of sustained growth. Today, their destinies look very similar, with slowing growth and productivity staring at them. How Warsh and Shin respond to these challenges will be keenly watched on both the sides of the Pacific Ocean.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.