ACCESS A BROADER MARKET PERSPECTIVE

CENTRAL BANKS ARE UNDER ASSAULT

BY JOHN VELIS, PHD COVER ILLUSTRATION: NA KIM CENTRAL BANKS ARE UNDER ASSAULT

BY JOHN VELIS, PHD

CENTRAL-BANK political spectrum. Fed Chair Jerome Powell and others have underscored INDEPENDENCE their commitment to the central HAS BEEN bank’s independent decision-making process. TAKEN FOR GRANTED Such developments are not restricted to the US. Elsewhere: FOR DECADES. • Turkey’s President Recep Tayyip Erdoğan, who was sworn in for another Conventional wisdom, supported by examination, or even to avoid having five year term last July, has submitted nearly a century of economic history, their operational guardrails come the Turkish Central Bank to withering indicates that independent control under review. Their roles in allowing pressure to keep rates low to stimulate over monetary policy—insulated from significant financial imbalances to the economy and has claimed unassail- the direct interference and control of build up in recent years, and their able power to appoint officials at the political leaders—delivers better eco- subsequent enactment of unorthodox Bank. Soon thereafter, spooked inves- nomic outcomes. measures to combat the 2007–2009 tors sold their lira, shaving off about a Recently, however, that indepen- global financial crisis, are all worthy of third of its value in a single week last dence has been threatened, as polit- scrutiny. August. ical leaders have criticized monetary Nevertheless, recent years have seen • In India, Urjit Patel, then-governor authorities, and in some cases inserted a notable rise in critical rhetoric. The of the Reserve Bank of India, resigned themselves into the conduct of mon- biggest headlines have been generated following sustained pressure between etary policy. In the broader trend in the US, where President Donald the central bank and the Indian gov- towards populism, such institutions Trump has made numerous critical ernment, which—among other things— have been characterized as opaque statements about the Federal Reserve, reportedly wanted the RBI to transfer structures where unelected techno- telling the news media that the central bank reserves to the finance minis- crats make decisions that affect the bank has “gone crazy” and calling for try’s fiscal account and pushed to ease lives of millions of people. a rate cut. lending restrictions on state-run banks. If taken too far, such ill-advised med- Most recently, his two nominees • In Frankfurt, the closely watched dling could shake investors’ nerves and to fill current vacancies on the Fed’s succession of European Central Bank give rise to crises of credibility. seven-member Board of Governors President Mario Draghi will command To be sure, central banks have no have spurred controversy and oppo- attention. Mr. Draghi’s successor will sacrosanct right to remain above sition from institutionalists across the have a full plate of issues – whether One way to mitigate the criticisms is for central banks remits, is in fact the crux of study and to display their own political commentary on central banks. Nevertheless, the consensus around alacrity. central bank independence hasn’t had to envision the breadth and intensity of the current assaults from politicians and markets. It may very well be that we are entering an era in which that or not to champion moves to more easing, are the subject of lively debate consensus goes unheeded by govern- centralized fiscal and financial poli- even today—both within and outside of ment leaders. cymaking; how supportive the ECB the central bank itself. Central banks are not ignorant of should be towards profligate countries Politicians have different incentives the threats to their operational inde- in the union; and how aggressive mone- than do central bankers, and exploiting pendence. In fact, the independence tary policy should be in combatting low the currency to meet short-term polit- they do enjoy is bestowed upon them inflation, to name a few. ical objectives is a tempting lever for by political masters, and it can always It should be noted that disagree- them. be circumscribed or diminished— ments—and even open tensions— But in an era of floating exchange even to the point of being withdrawn between political leaders and central rates and fiat currencies, the value of altogether. banks have surfaced before. Famously, a country’s money—and ultimately the One way to mitigate the criticisms is there were tensions between former US living standards of the populations that for central banks to display their own President Ronald Reagan and then-Fed use it—is determined by its ability to be political alacrity. They have taken steps Chair Paul Volcker over the central credibly managed, with a stable foreign in recent years to be more transparent bank’s highly restrictive monetary exchange value and free from erosion by and to stay above the fray, often while policy in the early 1980s as the Fed set domestic inflation. being the only policymaking bodies out to quash a decade’s worth of exces- In fact, the domestic laws which with the operational flexibility and sive inflation. give statutory life to central banks in tools to confront economic difficulties. Furthermore, the incongruity many countries prescribe some com- Chair Powell admitted in February between politicians’ agendas and those bination of price stability and max- Congressional testimony that the inde- of their central banks is not always mis- imum employment (and in some cases pendence of his institution is a fragile guided. Historians often cite the Fed’s responsibility for the stability of the thing, saying that Americans and the reticence to loosen policy after the domestic financial system as well) as government “can hold us accountable.” stock market crash of October 1929 as the monetary authorities’ objectives. This give and take is always present a major contributing factor to the Great If central banks err on the side of and financial market participants are Depression. slightly above-target inflation in order mindful that central banks give just Legitimate questions also surfaced to ensure the economy is on solid enough, lest more be taken away from around the Fed’s behavior during the footing, for example, that would be them. mid-2000s and whether or not it was an entirely different question from too sanguine in confronting the housing whether or not the central bank should John Velis is an FX and global macro bubble and banking sector excesses that avoid policies that weaken the stock strategist at BNY Mellon Markets in New led to the eventual collapse in 2008. Its market and potentially hurt the polit- York. Questions or Comments? Write to response to the crisis, first in buying up ical executive’s popularity. [email protected] or reach out distressed assets and then in engaging Getting it right, especially when bal- to your usual BNY Mellon relationship in subsequent rounds of quantitative ancing potentially conflicting policy manager. BNYMELLON.COM

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