Fed's Bullard: Central banks have let independence slip

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Published January 04, 2013

| Reuters

The world's top central banks have sacrificed some of their cherished independence as a result of fiscal-like policies undertaken to repair the damage of the global financial crisis, a senior Federal Reserve official said on Friday, calling the ECB one of the worst offenders.

James Bullard, president of the St. Louis Federal Reserve Bank, described the European Central Bank's bond-buying program as a "fiscalization" of monetary policy, and said it had weakened the ECB's response to the European recession.

"Why? By nearly all accounts, the monetary policy process has been bogged down by political wrangling over the OMT and other programs," Bullard said at the annual meeting of the American Economic Association.

The OMT, or outright monetary transaction program, is the ECB's bond-buying program that allows for potentially unlimited interventions for ailing states.

The Fed has also been accused of straying into fiscal policy territory, which is supposed to be the exclusive preserve of elected politicians in the United States, via a massive bond- buying program that has ballooned the size of its balance sheet.

The U.S. central bank was slammed by Republicans during last year's presidential campaign for pursuing policies which they claimed as favoring the re-election of President Barack Obama, a Democrat, who was awarded a second term by voters on November 6.

Former Fed Vice chairman Donald Kohn, a fellow panelist with Bullard, said the spectacle of Republican presidential candidates competing over who would be the "fastest to fire" current Fed Chairman Ben Bernanke if they won the White House had not been encouraging.

"I worry about the Fed in an era of polarized and extreme political discourse," he told the packed audience of economists, referencing congressional efforts to subject the central bank's monetary policy decisions to external audit.

Other panelists included John Taylor, author of the influential Taylor Rule of monetary policy governing the relationship between economic slack and inflation, Fed historian Allan Meltzer, and former Fed vice chair Alan Blinder.

"Should we be worried about the Federal Reserve's independence in the aftermath of the financial crisis? My answer is yes," Taylor said.

He argued that the Fed had voluntarily given up some of its political independence, rather than as a result of direct congressional action, and suggested this could be best restored through legislation.

CREEPING POLITICIZATION

Bullard said abandoning a rules-based approach to monetary policy, and getting sucked into actions outside their remit, was leading to the "creeping politicization" of central banking globally -- something that would deliver disappointing economic results.

"The macroeconomic performance of nations with politicized central banks has historically been quite poor," said Bullard, a voting member of the Fed's policy-setting committee this year.

Hawks fear the unprecedented efforts of the U.S. central bank to spur hiring and economic growth will eventually lead to higher inflation that will be extremely painful to curb.

The Fed last month voted to maintain mortgage-backed and Treasury bond purchases at an $85 billion monthly pace, and to keep expanding its balance sheet through this policy of so-called quantitative easing until it sees a substantial improvement in the outlook for the labor market.

It also committed to hold interest rates near zero until unemployment declined to 6.5 percent, provided inflation remained beneath 2.5 percent. The Labor Department reported that U.S. unemployment remained at 7.8 percent in December.

(Reporting By Alister Bull and Ann Saphir; Editing by Leslie Adler and Diane Craft)

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