Mess With Central-Bank Independence at Your Peril
In most of the developed world, central banks are free to set monetary policy without the interference of those who depend on voters for their employment. That independence, though, is "not set in stone," as former Federal Reserve Chairman Alan Greenspan noted in his September 2007 memoirs. And there are worrying signs that, against the current backdrop of record-low interest rates, politicians are tempted to start meddling.
The latest attack on independence comes from a very unlikely source. In an article for the Telegraph newspaper published on Tuesday, former U.K. Foreign Secretary William Hague, now Lord Hague of Richmond, wrote that "central bankers have collectively lost the plot. They must raise interest rates or face their doom."
Bemoaning the lot of savers in a low-interest rate world has become commonplace. Prime Minister Theresa May was scathing earlier this month in her attack on the unwelcome side effects of Bank of England policy. German politicians have grilled European Central Bank President Mario Draghi about his negative interest-rate policies.
But this is different. Hague went on to issue a sinister threat to the Fed and its central-banking brethren:
Unless they change course soon, they will find their independence increasingly under attack. The only way out is for the U.S. Fed to summon the courage to lead the way to higher interest rates, and others to follow slowly but surely. If they fail to do so, the era of their much-vaunted independence will come, possibly quite dramatically, to its end.
Last month, U.S. presidential candidate Donald Trump accused Fed Chair Janet Yellen of keeping U.S. borrowing costs "artificially low to get Obama retired." Trump also said Yellen was "very political," and that "she should be ashamed of herself." In February, he tweeted that it is "important to audit the Federal Reserve."
Now, whatever you think of Trump, his claim that Fed policy is partisan and designed to aid the Democrat party is patently absurd, and easily dismissed as part of his scattergun approach to politics and populism. But Hague is no firebrand with a story to sell; he's an old-fashioned Tory patrician who was leader of the Conservative party at one point, and was a member of Parliament for a quarter-century.
So Hague's comments -- coming just a day after the prime minister had to publicly declare her support for Bank of England Governor Mark Carney -- seem like nothing less than a shot across the bows of central-bank independence. Toby Nangle, co-head of asset allocation at Columbia Threadneedle Asset Management, summarized the threat in a tweet: "Raise rates or have your independence revoked."
Carney has already made his displeasure known. "It can be difficult sometimes if there are political comments on our policies," he said last week. "The objectives are what are set by the politicians. The policies are done by technocrats. We are not going to take instruction on our policies from the political side."
Central bank independence isn't enshrined in the laws that govern the universe; the Bank of England, for example, has been free to set interest rates as it sees fit for less than two decades. And while worries that independence is under attack might seem overblown, re-reading what May told her party last month in the light of Hague's article this week should give pause (emphasis added) :
While monetary policy, with super-low interest rates and quantitative easing provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects. People with assets got richer, people without them have suffered, people with mortgages have found their debt cheaper, people with savings have found themselves poorer. A change has got to come and we are going to deliver it.
Governments have abdicated responsibility for economic stability to their central banks. They've set inflation targets of 2 percent almost everywhere. Politicians can't complain if their appointees attempt to fulfill their mandates by keeping interest rates at record lows -- even when that hurts savers.
But the more powerful central bankers become, the more tempted politicians will be to meddle. Here's what Alan M. Taylor, an economics professor at the University of California in Davis, told a conference organized by the Austrian central bank in Vienna last month:
Society may now be asking more of central banks, and central banks will now try to find a way to serve those goals. Central banks can therefore expect to become less independent and more politicized going forward.
I'm as skeptical as any gold bug of the merits of allowing unelected academic economists to run the global economy; but my concerns are about the resulting groupthink and the lack of entrepreneurs and business folk among the policy makers, not their freedom. But trying to bully central bankers into raising interest rates by threatening to annul their independence seems like a dangerous game -- especially given the fragility of the global economy.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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