Central Bank Independence
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From Goldman Sachs Research, this is Allison Nathan. Welcome to Top of Mind, a podcast that explores macroeconomic issues on the minds of our clients. In this episode, we're taking a look at growing concerns about the independence of central banks around the world. Here in The US, that independence has been threatened by president Trump's clear disapproval of the Fed. Let's put it this way. He's equated the Fed to a golfer who can't putt and called its logic faulty. Now White House pressure on the Fed to lower rates isn't anything new. We saw this more than once back in the seventies and eight
We're gonna be breaking records. If we had a fed that would lower interest rates, we'd be like a rocket ship. But we're paying a lot of interest and it's unnecessary, but we don't have a fed that knows what they're doing.
Despite the very public criticism, fed chairman Jay Powell insists it's not influencing the fed's decisions. Here he is at the press conference last month after the Fed cut interest rates for the first time in over a decade. We
never take into account political considerations. There's no place in our discussions for that. We also don't conduct monetary policy in order to prove our independence.
But it's not just The US where there might be cause for worry. The effectiveness and credibility of monetary policy have been called into question across advanced economies, thanks to slow growth, a rise in populism, and the potential need for more coordination between monetary and fiscal policy in a world of already low interest rates. These concerns were somewhat reinforced by the appointment of Christine Lagarde, a politician rather than a central banker, as the next president of the European Central Bank. And the challenges of resisting political influence are even more acute in emerging m
I think the importance of Fed independence is to have a group of people who are looking at the economy and analyzing the economy with respect to the long run goals of economic policy, that is this maximum employment and stable prices. The problem with having a non independent central bank under the thumbs of the politicians is the politicians have a much shorter timeframe in mind than is consistent with achieving these goals. So the politicians are looking at the next election. And their impulse, and we're seeing some of it today, is to step on the gas as hard as you can until the next electio
That said, a primary argument for central bank independence historically was that central banks needed independence to credibly fight inflation. So I asked Cohen if independence was really as necessary today when persistently low rather than high inflation seems to be the bigger problem. Here's Cohen again.
A lot of desire for central bank independence grew out of the nineteen sixties and seventies, which were a very inflationary period and which monetary policy wasn't sufficiently focused on price stability and the Federal Reserve was subject to a good bit of political pressure to keep the focus on employment rather than price stability. So economists and politicians recognize that in order to get price stability and to get good performance of the economy over time, there needed to be some arm's length relationship between the technocratic central bank and the political process. Now you could ar
also spoke to sir Paul Tucker, former deputy governor of the Bank of England. He agrees with Cohen that central bank independence is critical to maintaining stable inflation and a functioning banking system. But he argues that advanced economies have become too reliant on ce
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