Federal Reserve Chairman Ben S. Bernanke said central banks must be free from political pressure as they bolster regulation and try to prevent future financial crises.
“In undertaking financial reforms, it is important that we maintain and protect the aspects of central banking that proved to be strengths during the crisis and that will remain essential to the future stability and prosperity of the global economy,” Bernanke said today in a speech at the Bank of Japan in Tokyo.
Bernanke and other central bank chiefs have faced mounting political threats to policy independence while combating the worst financial crisis since the Great Depression.
In the U.S., Bernanke is trying to beat back legislation he says may reduce economic and financial stability by impinging on policy makers’ autonomy in setting borrowing costs. European Central Bank officials are defending their independence after the institution backed financial support for countries including Greece. In Japan, the government has pressured the central bank to help spur the economy and eradicate deflation.
Bernanke highlighted the benefits of autonomy rather than discussing recent threats.
“In exchange for this independence, central banks must meet their responsibilities for transparency and accountability,” Bernanke said to a conference hosted by Japan’s central bank.
The Fed is “committed to exploring new ways” to increase transparency, Bernanke said. He didn’t identify such initiatives beyond central bank efforts in recent years including expanded reports on its balance sheet.
Bernanke, 56, visiting Japan after economic talks with China in Beijing, didn’t discuss the near-term outlook for the U.S. economy or monetary policy in the speech.
Responding to questions afterward with Bank of Japan Governor Masaaki Shirakawa, Bernanke said central banks should hold to a 2 percent target for inflation.
“Central banks of the world have over many years now established a great deal of credibility for inflation rates in the vicinity of about 2 percent, and there would be a very risky transition if we in any way reduced our commitment to a 2 percent inflation target,” Bernanke said. “We’re not sure how expectations would react.”
The Fed chief and his colleagues are trying to head off potential political pressure on their internal debates over when and how fast to raise interest rates from a record low and sell $1.1 trillion of mortgage-backed securities that were purchased to reduce home-loan costs and revive growth.
A central bank needs protection from political interference in setting interest rates, buying or selling securities and serving as a lender of last resort, Bernanke said.
“Policy makers in a central bank subject to short-term political influence may face pressures to overstimulate the economy to achieve short-term output and employment gains that exceed the economy’s underlying potential,” Bernanke said. That may “generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation,” he said.
A 1997 change to Japanese law bolstered the Bank of Japan’s autonomy for setting monetary policy by “significantly” reducing the scope for the Ministry of Finance to influence the central bank’s decisions, Bernanke said.
After a March report that Japan’s consumer prices fell for a 12th month in February, Japanese Finance Minister Naoto Kan said that “more efforts are needed to beat deflation.”
Bernanke mentioned the ECB without discussing the current sovereign-debt crisis, saying the institution’s independence “has helped to keep euro-area inflation expectations firmly anchored.”
The ECB this month started a program of purchasing government bonds in the secondary market to help push down borrowing costs for Greek, Spanish and Portuguese governments and lend support to a European Union rescue plan totaling 750 billion euros, or about $930 billion. The euro has plunged about 14 percent against the dollar this year on concern that some countries in the euro area are at risk of default.
Earlier this month, ECB President Jean-Claude Trichet rejected the suggestion that his institution gave up its independence when it agreed to buy bonds.
“Just who has been weak over the past few months?” Trichet said in an interview with Der Spiegel, a German news weekly, published May 17. “It was not the ECB. The governments with their high debts were weak.”
The U.S. Senate approved regulatory-overhaul legislation last week that would open the Fed to a one-time audit of its emergency loans and other actions to combat the financial crisis starting in December 2007.
The measure, while requiring the release of more data than Bernanke said in February the central bank was willing to provide, keeps in place a 1978 shield from congressional audits of Fed interest-rate decisions. The Senate defeated another proposal, opposed by the Fed, that would have removed the shield. Bernanke and other Fed officials have said that would risk politicizing monetary policy.
The language to eliminate the exemption was passed by the House in December. Legislators from both chambers are preparing to reconcile the two bills.
Bernanke, while advocating increased transparency for Fed policies and decisions, has held firm against other changes such as identifying banks that borrow from the Fed’s discount window. The central bank is contesting a U.S. appeals court decision from March in a case launched by Bloomberg LP, the parent of Bloomberg News, that the Fed must identify firms that borrowed from four lending programs.