Does Federal Reserve’s move towards Flexible Average IT mean end of independent central banks?

David Marsh of OMFIF in this interview discusses the political economy of Fed’s recent change to FAIT:

Der Spiegel: Critics say that the basket of goods and services used by the ECB to measure the inflation rate, which in turn is the basis of its monetary policy, is calculated incorrectly. Do you agree with that criticism?

Marsh: I think so, yes. The real inflation is higher. As I said, real estate prices, including rents, are decisive for the cost of living and the shopping basket does not reflect that. But that is not the real problem.

Der Spiegel: What is?

Marsh: The politicisation of the central banks. The new Fed strategy is the strongest sign that central banks are taking on more and more tasks for which politicians are responsible, such as fighting unemployment. The ECB, which wants to present its new strategy in 2021, will follow in the Fed’s footsteps. We are witnessing the end of independent central banks – which was partly a myth anyway.

Der Spiegel: They were never completely independent.

Marsh: Ever since the Fed announcement, this myth has been shattered. The central banks are more politicised than they have been for decades. In Japan, this has been the case for a long time. In Europe, French President Emmanuel Macron set an example in this respect by cleverly taking Chancellor Angela Merkel by surprise and making Christine Lagarde president of the ECB.

Der Spiegel: So we have a situation in which inflation is higher than the official figure, which central banks tolerate – first tacitly, but now officially. And that is done as a way to support nation states? The accusation of central banks providing state financing is one of the harshest that can be made.

Marsh: It is more complex than that. In general, it is quite right that central banks support goals set by politics. But they must not lose the ability to do the opposite when necessary, for example when inflation rises. Central banks must not allow governments to use inflation as a weapon against debt.

Der Spiegel: Did Fed Chair Jerome Powell cave in to Donald Trump? The president had been tweeting for quite some time that the Fed should ease the reins to allow more growth.

Marsh: On the one hand, Powell has adjusted strategy to reality. At the same time, the colossal public pressure that Trump has been exerting has had an effect. When Trump summoned him to the White House at the beginning of 2019, Powell should have said, ‘Get my secretary to give you an appointment, but not for six months’. Of course, he didn’t do that.

Haha. Imagine Powell saying this and Trump tweeting about Powell not giving him appointment…

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: