US Fed’s Powell defends central bank independence

Washington (AFP) – Political meddling in central bank policies has proven disastrous for economies and monetary policy independence should be maintained, Federal Reserve Chair Jerome Powell said Friday.

Powell acknowledged that central bankers have a responsibility to communicate about their decisions but must be free to choose the tools they employ for monetary policy and financial regulation.

“We must not forget the lessons of the past, when a lack of central bank independence led to episodes of runaway inflation and subsequent economic contractions,” Powell said in a speech prepared for delivery to a Riksbank conference in Stockholm.

He warned that central banks could not take their independence for granted, especially with public opinions about government institutions at historic lows.

But he said there were “demonstrated benefits of insulating monetary policy decisions from shorter-term political considerations.”

Powell did not mention efforts in the US Congress to impose strict rules on the Fed to limit its leeway in making monetary policy decisions but seemed to refer to the issue obliquely.

“Within our narrow mandates, to safeguard against political interference, central banks are afforded instrument independence — that is, we are given considerable freedom to choose the means to achieve legislatively-assigned goals,” he said.

And he stressed that the policy independence is equally important in a central bank’s oversight role, since “research suggests that a degree of independence in regulatory and financial stability matters improves the stability of the banking system and leads to better outcomes.”

But some of the extraordinary steps taken to deal with the 2008 global financial crisis, after interest rates had been cut to zero, contributed to public mistrust of the institutions, the Fed chief said.

– US deficit unsustainable –

This reinforces the need for central bankers and regulators to be more transparent about policies as “ongoing dialogue will work to enhance public trust” and “strengthen the foundation of democratic legitimacy,” he said.

It also helps institutions like the Fed to keep up with financial innovations which could sow the seeds of a future crisis, he added.

In a panel discussion with current and former central bankers, Powell downplayed concerns the high US debt and deficit level would make it harder to respond to the next economic downturn.

But he agreed that the US government needed to address the issue and that it was better to do so now, while the economy is healthy.

“It’s a fact that the United States is not on a sustainable fiscal path. It’s a serious problem,” Powell said.

However, he said he viewed the issue as “more of a medium- and longer-term problem.” 

“It’s not literally the case that we wouldn’t have fiscal space to respond in the next few years,” in the event of recession,” he said. “Nonetheless it is a problem that needs addressing urgently in the United States.”