Jacob Frenkel is passionate about many issues when it comes to central banks, the policy decisions they make, and what they can do to improve outcomes.
As governor of the Bank of Israel in the decade of the 1990’s he’s credited with having implemented market-oriented policies that transformed the Israeli economy by conquering inflation, liberalizing markets, and integrating Israel into the global financial system. In other words, he knows how to analyze the problems at hand and work to find ways to solve them. It is in his central banker DNA.
But this year at the Federal Reserve Bank of Kansas City’s Annual Symposium, which Jacob has been part of for 40(!) consecutive years, he and everyone in attendance was passionate about one overriding issue: the attack on the Federal Reserve’s independence by the Trump administration and how it is shaking confidence in the halls of central banks around the world.
”Independence… I'm setting the goal, says the government…And I'm giving you the tools to achieve this goal,” Jacob says. “But I'm not interfering in the way you are implementing the (policy) instruments, because the instruments that I've just given to you can be abused if you are guided by political pressures. So this is really the real issue.”
As for the issues surrounding Fed Governor Lisa Cook that led President Trump to say he is firing her, Jacob says he does not like to see a member of the Fed’s Board of Governors pushed out summarily. But he also agrees that “we should be very strict about dealing with improprieties if there are any.”
Here’s Jacob’s kicker: “But the important thing is we should not allow politicization of monetary policy.” Period. But unfortunately, not yet end of story.
So dive in and hear what he has to say about all of this. Let me know what you think.
Very important! There is much more to this interview than central bank independence. DO hear what Jacob has to say about Trump’s tariffs and how he sees the evolution of economists’s views on them. When the process started, it was all about how destructive tariffs would be. “And it now seems that at least where agreements have been reached, the tariffs that have ended the process were less severe than what was the threat originally,” he says. “So we are coming back to, to normal.”
And, as the Fed is seen now leaning more and more to the labor market side of the dual mandate, and becoming more willing to risk seeing rising inflation in order not to see rising unemployment - still at very low levels - start rising again, hear what Jacob says about all of this. Spoiler alert: he favors the traditional view, carried down from Paul Volcker and Alan Greenspan, that price stability first and foremost is the way to achieve maximum employment.
The uniqueness of Jackson Hole 00:02:20:2
For some years, it <Jackson Hole> included people from the financial sector, people from academia. But most importantly, it is always led by and organized by the Federal Reserve. And the chairman of the Federal Reserve over the years has given his own support and glory to the place. They use the venue to make important announcements. But the most important element of this place is that it is informal.
It’s a real insiders’ meeting place 00:02:52:23
The informal gathering of policymakers enable them to get to understand each other better, get to know each other better. So it's time of challenges. They don't need to look at the book and see who is sitting where they know. Right. They have been in continuous contact. And that's an extremely important we have seen over the past several years.
A useful; network formed as well 00:03:17:08
Our system has been plagued by many shocks that central banks had to address promptly. And I think that the network that has been created here is second to none. Well, I can only agree. And of course, we do have Jay Powell, Christine Lagarde, who is president of the ECB. We have Governor Ueda from the Bank of Japan this year. …And then so many people from around the world, Latin America, Asia, wherever, there are many, many people here like that.
A rich docket of papers in store 00:03:54:07
And there's going to be a lot of look at, artificial intelligence and how that's going to affect the labor market moving forward. And there's also other big focal point of where's the fed? Where is it taking policy?… And that's certainly a focus here. Will there be some signals of a rate cut in September, for example? There's also a framework review that that's looked at that period in particular from 2020 to 2025 during the pandemic when inflation went way high, way out of control. Are they have any ideas about how to avoid that in the future? But importantly, the big one central bank independence even before the president got reelected, this, push to get Jay Powell to start cutting rates as fast as you can has been getting louder and louder and harder and harder for independence, central bank independence.
Central banks answer to governments: what they need is autonomy from politics
00:04:42:07
Central bank independence or autonomy - where do we start? Well, I think this is the key point that separates successful central banks from less successful central banks. And I think that there is a lot to explain. Why do we need central bank independence? And I want to highlight here a distinction in language. I prefer to call it central bank autonomy rather than independence, because they are not independent of the political structure. Of course, they are subject to the rules of the country, but autonomy means that the government, in its wisdom, has decided to delegate some of the authority to a central bank in order to protect the country as a whole from the built-in biases. And let me articulate, okay, politicians, good people by their nature, are more short-term oriented.
Politicians always are looking for quick solutions 00:05:42:13
Many processes require much longer transition period, not just a preparation period. And politicians want to have the results now and therefore they want to take shortcuts. It is very important that when it comes to monetary policy, that operates only over time, that the decision is not being tainted by the opportunistic interests of the short-term and therefore central bank independence is … one in which you give the central bank the authority and the luxury in a way to move into the medium term, and that's essential.
The gift of independence 00:06:51:20
Independence. It means that you are allowed. I'm setting the goal, says the government…And I'm giving you the instruments to achieve this, this goal. But I'm not interfering in the way you are implementing the instruments, because the instruments that I've just given to you can be abused if you are guided by political pressures. So this is really the real issue. More and more, we have realized that communication and openness and transparency over the central bank is part and parcel of its success. Okay. So, in other words, you are implementing. But in the modern world, where markets are so deep and vast and international. It's not good enough that you are sitting in your office and you change the gauge of interest rate and hope for the best.
A shift to a policy of dynamic transparency 00:07:54:23
You need to explain what you are doing, why you are doing it to form the expectations. And once you do it successfully, your life is becoming much simpler. There was a period, well, the process of monetary policy making was very secretive. You are in closed doors. If there was a leak, you failed. There should be no leak because nobody should anticipate. And then we knew <different> we announced the new policy. Everyone sees it and now it moves. Now it's interactive with the market. The market gives you a continuous referendum and non-stop referendum. Well, they think about what you do and you are communicating with the market trying to guide it. Once in a while maybe once a month once or whatever.
Independence, even in if under attack is still essential 00:10:00:18
Well, it's a very delicate topic that you are bringing up <the Lisa Cook matter> , which is when I emphasize the importance of central bank autonomy or independence, as people call it. You know, some politicians say, what do you mean? I was running for office. I was elected by the people. And suddenly I have to abide by the rule of somebody who I nominated. You look at that. Said I got it for you. But the important point to notice, that's what I said. The distinction between goal independence and instrument independence. The government, the president, Congress, whatever sets the goals they have, the authority to do it. They delegate the instrument to achieve it to a professional body that looks into the medium term and protects us from our own political biases.
Keep standards yes, but also political independence 00:10:58:11
That's key. Now, with this perspective, when you are asking here, a one of the Board of Governors member may step down or may be pushed out or whatever. I really don't like it. I think we should be very strict about dealing with improprieties. If there is any. But the important thing is we should not allow politicization of monetary policy.
The Fed and the Dual Mandate 00:13:32:13
Okay. Are they complementary? Are they contradictory? In some times you look at one, sometimes and other times, at the other. And it came to be, came to be called the, dual mandate of the central bank. But there is only one chairman of the board. There is only one board of governors of the central bank. There is only one open market committee. Which of the two goals they should look at and if they are conflicting, how should they do the trade off if there is any? That's why when Paul Volcker, I asked Paul Volcker, how do you manage it? Yeah. And I asked Alan Greenspan, how do you manage? Paul Volcker never used the concept of … dual goals. Basically their view was that the central bank should aim at price stability. And yes there are some other objectives within the law. But the best way that the central bank can contribute to the attainment of maximum growth and employment is by creating the environment of price stability. And with this the central Bank contributes to its dual mandate.
Price stability is the key 00:14:51:06
But by and large it is focusing on this price stability because that's what the instrument that the central bank has; and has been aiming for it over the years. As with the development of financial markets, everyone's realized that by securing price stability alone, you do not secure yet necessarily financial stability and many of the central banks have added to their responsibilities. Also securing financial stability and occasionally in times of complete extreme case, also the role of being the lender of last resort. So all of those are interrelated. But for example, you know, in Europe, the European Central Bank has in its charter the goal of achieving price stability. The way they define it is about 2% or a little bit less.
Tariffs the terrible 00:21:17:01
I think that's (hating tariffs) by and large been the DNA of economists at least since the times of David Ricardo, Adam Smith. That's why those who believeause they this… understand the principles of comparative advantage.
Comparative advantage 00:22:06:00
They understand the value of free trade. They understand that not all of us need to produce everything, but we should allow others to produce things that they are good at and allow us to produce something that we are good at. And we trade in. Obstacles to this, by and large, are not constructive. Yet when it comes to policymaking, we need to realize that every tariff can be decomposed. In fact, into two elements. Every tariff can be decomposed into two elements. If you impose a tariff on a specific good, it is equivalent to give subsidy to the production of that good right. And a tax on the consumption of that good. If you are combining these two, you have the tariff. Now, the economic theory normally tells you that if you want to promote a specific industry, subsidize it, or if you want to deter the consumption of specific goods, tax it, do not intervene.
A transformative understanding of Trump’s tariffs- 00:23:40:09
Now comes the current situation. Obviously, President Trump believes the tariffs are the most important policy instrument. It took some time for the economists to accept that political reality. Okay. At the beginning, when he came up with extraordinary threats about tariffs most of the economists were very critical. Okay. There was one line that said, wait, maybe it's all a matter of negotiations, And let's look where it ends. And it now seems that at least where agreements have been reached, the tariffs that have ended the process were less severe than what was the threat originally. So we are coming back to, to normal. I think that much of the interest of Trump in tariffs come from efforts to really put China in place, and at the end of the road, the tariffs on China will be higher than the tariffs or others.
China has other issues 00:24:52:10
But that's a separate matter. And there is an issue with China, especially when it comes to property rights and technology transfers. It's a national security issue. But that's basically where it is. Well put. That's a ‘no.’ I am pleased to hear you say that that now where we are, we it's maybe not exactly what the standard view was.
Globalization backtracking 00:25:30:16
I think that globalization served society extremely well. It lifted millions of people out of poverty. So this is number one. The fact that there is now tendency to get away from globalization and to see tendencies to of fragmentation does not reduce the reality that we are still interdependent because we are interdependent.
Globalization may diminish but it is still a reality 00:26:04:01
We are now missing maybe the machinery that will allow us to internalize the externalities that globalization provided us. But the challenge is still there. Let me just remind you just a little bit. You remember we have had the the Covid crisis. And with the Covid, a lot of supply chains were broken because of the difficulties of transportation and all the rest. And we saw a glimpse of what happens and how interdependent we are and what happens when imported raw materials do not arrive. So I think that the idea of let's fight China off, let's fight. Let's do this. Be careful that it may come through. You don't want this to happen. You want steel to have a managed, interdependent system because we need each other.
In the big picture- praise for Powell 00:27:16:18
I think it is fair to say and to recognize that Jay Powell has led the monetary system in an extremely prudent and wise way during the past several years. Let's not forget that he had to go through various crises, including the Covid system, including the war in Ukraine, that has had profound implications on the flow of goods as well as on price pressures, etc. And I thought that all along the Fed has stood very, very wisely and prudently… This is very important. I am very concerned with the politicization that…at least that comes out on the press about the appointments to the board, of lack of appointments and guessing who is supporting whom. Because the complexity that the financial system has requires the best people in the job.
Jacob A. Frenkel
Dr. Jacob A. Frenkel is Chairman Emeritus of the Group of Thirty (G-30), a private nonprofit Consultative Group on International Economic and Monetary Affairs, he is also Chairman of the Board of Directors of the financial firm Plus500 and the Global Advisory Board of the Financial Advisory firm Value Base.
Dr. Frenkel served as Chairman of JPMorgan Chase International (2009-2020), as Chairman and CEO of the G-30 (2001-2011), as Chairman of the Board of Trustees of the G-30 (2012-22), as Vice Chairman of American International Group (2004-2009), and as Chairman of Merrill Lynch International (2000-2004). During (1991-2000) he served two terms as the Governor of the Bank of Israel. He is credited with reducing inflation in Israel and achieving price stability, liberalizing Israel’s financial markets, removing foreign exchange controls, and integrating the Israeli economy into the global financial system.
During (1987-1991) he was the Economic Counselor and Director of Research at the International Monetary Fund, and during 1973-1987 he was on the faculty of the University of Chicago where he was the David Rockefeller Professor of International Economics and Editor of the Journal of Political Economy.
He is a Fellow of the Econometric Society, a Foreign Honorary Member of the American Academy of Arts and Sciences, a Distinguished Fellow of the CEPR, a member of the Board of Directors of the National Bureau of Economic Research, of the Institute for National Security Studies (INSS), of the Peterson Institute for International Economics, of the Aspen Institute Italia, and is a Global Member of the Trilateral Commission. He was a member of the G20 Eminent Persons Group on Global Financial Governance, a member of the G20 High Level Independent Panel on Financing of the Global Commons for Pandemic Preparedness and Response.
Dr. Frenkel served as Chairman of the Board of Governors of Tel Aviv University (2013-21), where he is Chairman of the Frenkel-Zuckerman Institute for Global Economics. He previously served as Chairman of the Board of Governors of the Inter-American Development Bank (1995-1996), as Vice Chairman of the Board of Governors of the European Bank for Reconstruction and Development (1999-2000), as a member of the Economic Advisory Panel of the Federal Reserve Bank of New York (1986-2014), and as Chairman of the Cabinet of Economic Experts of the Minister of Finance, the State of Israel (2022-23). During 2009-19 he served on the Board of Directors of Boston Properties, and of Loews Corporation.
Dr. Frenkel is a Laureate of the 2002 Israel Prize in Economics, and is a recipient of several Honorary Doctoral degrees and other decorations and awards from various universities and governments. Dr. Frenkel is the author of numerous books and articles in the fields of International Economics and Macro-Economics. He holds a B.A. in economics and political science from the Hebrew University of Jerusalem, and an M.A. and Ph.D. in economics from the University of Chicago.
