CENTRAL BANKS, INFLATION AND POLITICAL CONTROL

Presidents have long pressured central banks. Independence is recent. Low growth & high debt weaken monetary power. Inequality feeds populism, and unelected bankers now face sustained political attack

- SATYAJIT DAS

HE spat between the White House and Fed Reserve Chairperson Jerome Powell, an appointee of US President Donald Trump, is hardly unusual. Lyndon Johnson and Richard Nixon bullied the central bank into lowering interest rates.

Central banks function as the government's banker, issue currency, maintain the payment system, and manage the nation's currency reserves. They safeguard financial stability, acting as a lender of last resort to banks, although separate bodies sometimes regulate the financial system. The contentious part of their mandate is controlling the money supply and setting interest rates.

Central bank independence is recent. In 1990, New Zealand legislated inflation targeting, which other nations adopted. The concept was that an independent institution would determine monetary policy and maintain price stability, minimising opportunities for politicians to use interest rates to boost economic activity, especially around elections. The context was the high inflation era of the 1970s and 1980s. It was convenient to transfer painful choices to central bankers, allowing governments to blame others or claim credit depending on the outcomes.

The case for independence is unclear. The objectives, such as relative price stability, growth and employment, are frequently contradictory. It is unclear which of the multiple measures of price levels should be prioritised. The 2-3 percent inflation objective is arbitrary. Empirical studies suggest that fear of deflation may be unwarranted. There are differences in what constitutes full employment. Data, rarely timely, has methodological problems. The representativeness of items used to measure inflation is contested. Unpaid work, zero-hour agreements, and contracting complicate labour statistics. Resource scarcity or sustainability is ignored.