Fischer's Cry for Central Bank Freedom Carries Warning for World

Will Fed Raise Rates in Dec. and Then Again in March?
  • Research suggests inflation stays weaker with indepedence
  • Fed Vice Chairman said independence of `highest importance'

When Stanley Fischer spoke out in defense of the Federal Reserve’s independence last week, he delivered a warning to politicians for central bankers the world over.

From the U.S. and U.K. to Poland and Kazakhstan, officials who set interest rates are finding that former Fed Chairman Alan Greenspan was correct in saying their freedom from politicians is “not set in stone.”

Just last Thursday, Fischer, the Fed’s vice chairman, pushed back against congressional proposals to audit the institution’s decision-making. Meantime, Kazakhstan’s central bank chief was ousted and the Bank of Indonesia again faced government pressure to ease.

The worry is that if the autonomy of central banks is chipped away, they may find it harder to deliver price stability amid political demands to spur short-term growth or finance fiscal spending. Fischer cited research in a speech last week showing an inverse relationship between inflation and independence.

‘Highest Importance’

“Monetary policy independence remains of the highest importance,” said Fischer, who successfully championed an overhaul of the Bank of Israel to win it policy-setting freedom when he headed that central bank. “It is important that we preserve monetary policy independence to help foster desirable macroeconomic outcomes and financial stability.”

Fischer attributed the increase in political criticism to what he said was a mistaken conclusion that the Fed responded to the financial crisis inappropriately. The main barb has been that the central bank’s easy money has boosted Wall Street rather than Main Street, drawing complaints from voters.

One aspect of the debate in the U.S. is how far a central bank needs to be accountable to the government without being beholden to it: Legislative proposals include plans for the Government Accountability Office to review and critique Fed policy. 

There are also calls for the Fed to be more mechanical in how it sets the policy. It may find that the pressure intensifies ahead of next year’s presidential election, with Republican candidates Ted Cruz and Rand Paul already on the attack.

‘People’s QE’

The Fed isn’t alone. The Bank of England has had to defend its independence, after the election of Jeremy Corbyn as leader of the opposition Labour Party. Corbyn has suggested the “People’s QE,” wherein the BOE would print money to fund politically directed infrastructure projects. The shadow chancellor of the exchequer, John McDonnell, had once advocated ending the bank’s independence and has set up a review of how it works.

Elsewhere in Europe, Polish central bank Governor Marek Belka has fended off what he called “illegal” calls by politicians to print money for budget financing. The Law & Justice party last month swept into power with plans to start a 350 billion-zloty ($88 billion) central bank loan program, following the likes of Hungary and Turkey in pressing the central bank to shore up growth. The party wants rate cuts and is planning to put supporters of its policies on the Monetary Policy Council.

Governor Fired

Indonesia’s vice president and minister in charge of economic coordination have put pressure on the central bank to cut rates this year to stimulate growth running around its weakest since 2009. And in Kazakhstan, President Nursultan Nazarbayev last week attacked the performance of the central bank and named one of his aides to replace Governor Kairat Kelimbetov, who had devalued the currency twice in two years.

Not all are being undermined. India’s central bank governor will get the tie-breaking vote in a new monetary policy committee, people familiar with the matter said in September. A previous draft bill gave the government majority control over the rate-setting body. President Mario Draghi said last week his European Central Bank has a high degree of independence.

Kenya is even moving to enhance the independent status of its central bank. The government of East Africa’s biggest economy is seeking to strengthen the legislation enshrining the institution to lessen any political involvement in senior appointments.

Central-bank independence “is a model that has served us and many other countries rather well over the past few years, and I think we ought to be very cautious about any unpicking of those arrangements,” Andy Haldane, the BOE’s chief economist, said in September, adding politicians are often “tempted at times of elections to do different things.”

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