The recent "it" story in Turkey that many media outlets are reporting on stem from comments made by prime minister Ahmet Davutoğlu and President Recep Tayyip Erdoğan, respectively. Both officials have been publicly supporting lowered borrowing costs for Turkish consumers and producers. They have at times criticized the central bank for not taking steps to decrease interest rates fast enough. Some in the press have criticized them for questioning the wisdom of the central bank. Do these same reporters have any idea what's going on in the U.S. Congress and the largest central bank in the world, the U.S. Federal Reserve (Fed)?
The most important news story of last week wasn't Federal Reserve Board Chair Janet Yellen's comments about continued "accommodative" central bank policies, it was the criticism hurled against Yellen and the Fed for being political and what steps Congress would take to rein in the Fed when necessary. Yellen testified in front of the House Financial Services Committee last Wednesday and was hit with a barrage of questions aimed at supporting the "Audit the Fed" movement. The bill introduced in Congress a month ago is supported by many front-running Presidential hopefuls in the 2016 elections, including senators Marco Rubio and Rand Paul, and has a good chance of passing. The bill would allow Congress to "audit" the Fed's actions and may go so far as to allow senators and representatives to set interest rates and change rules regarding banking policies.
The members of the committee were very vocal in accusing the Fed of "favoring capital over labor and ... favoring Wall Street over the folks back home." These words from Republican Congressman Sean Duffy of Wisconsin seem to be taken from speeches President Erdoğan has given in the past, accusing the "interest lobby" of undermining central bank policies. Both the president and prime minister have called for more accountability of the central bank, echoing the same calls by congressional leaders calling for the same. This legislation has been championed by Paul, a front-runner for the nomination of the Republican Party and son of former presidential candidate and Congressmen Ron Paul. The elder Paul's criticism of the Fed is legendary and has been joined by former governor of Texas and presidential candidate Rick Perry, calling the Fed's policies "treasonous."
I am also reminded of comments made by another current presidential hopeful on the other side of the aisle, Democratic front-runner, former first lady, senator and Secretary of State, Hillary Clinton, in criticizing Alan Greenspan for his advice given as the former Fed chairman. The Washington Post reported on Clinton's criticism calling Greenspan's comments "outrageous," and implied that "Alan Greenspan helped create record U.S. budget deficits that put national security at risk."
These news stories stem from last week's actions by the Central Bank of the Republic of Turkey (CBRT) and political reactions to their moves. The CBRT cut several key interest rates as inflation is expected to slow on lower energy costs. The monetary policy committee of the CBRT cut the one-week repo rate, the policy rate, to 7.5 percent from 7.75 percent. It also tightened the interest rate corridor, bringing the top and bottom in to 10.75 percent and 7.25 percent, respectively, from 11.25 percent and 7.5 percent. Last week, I had predicted a major cut in the rarely used overnight lending rate by up to 100 basis points and a minimal cut in the policy rate by up to 25 basis points. The lending rate was cut by 50 basis points and the policy rate was cut in line with my predictions.
The Turkish economy has proved itself to be very resilient despite being surrounded by economic turmoil. Its western neighbor, Greece, is in the middle of an economic depression even greater than the Great Depression of the 1930s. Turkey's trading partners and neighbors across the Black Sea, Russia and Ukraine, are amid armed conflict through proxies and to the east and south, Turkey borders Iran, Iraq, and Syria, all three of which are embroiled in armed conflict fighting Islamic State of Iraq and al-Sham (ISIS) terrorists in Iraq and Syria. Despite all of these major economic struggles, Turkey's economy continues to strengthen with growth rates and unemployment rates much better than many of its European neighbors.
Continued pressure by the U.S. Congress to "Audit the Fed" may pave the way for greater accountability of central banks to the electorate in the United States and abroad.