Central Bank Independence: What It Is, What It Isn’t – and the Importance of Accountability
July 19, 2019
Six takeaways from Boston Fed President Eric Rosengren’s July 19 remarks at the Annual Meeting of the Central Bank Research Association, held in New York City
- Takeaway: Central bank independence is not about deciding what overarching goals to pursue, but is rather about allowing the central bank to determine how best to pursue them.
Excerpt: “For the Federal Reserve, while long-term goals are determined by Congress, the day-to-day implementation of policies is and should be conducted based on data and technical analysis, independent of short-term political objectives.”
- Takeaway: Several mechanisms to ensure the Federal Reserve’s accountability to Congress have been enacted since 1977, when the Federal Reserve Act was amended to provide explicit goals for the Fed. The Fed has also taken steps to increase transparency, which improves accountability.
Excerpt: “…Increased transparency at the Fed has included clarifying annually our strategy of long-term goals and objectives, and adopting an explicit inflation target of 2 percent. What’s more, increased transparency around goals makes it easier for the public and Congress to evaluate how well the Fed’s actions are performing relative to those goals.”
- Takeaway: Studies focused on central bank independence have found countries with more independent central banks, such as the U.S., have lower inflation rates than those with less independent central banks.
Excerpt: “With greater clarity on goals, and more transparency and communication around how policymakers alter policy to achieve those goals, there has been considerable success in changing the inflation experience. … The high and variable inflation of the 1970s has been replaced by a low and remarkably stable rate of inflation since the early 1990s.”
- Takeaway: It is possible that the goals of the U.S. central bank (which center on attaining medium-run economic prosperity) can differ substantially from the understandably shorter-term pressures facing elected officials.
Excerpt: “Allowing the central bank the independence to alter its instruments as it deems necessary in the short- to medium-run reduces the possibility that political or partisan pressures will divert the central bank from its mandated monetary policy goals.”
- Takeaway: The Federal Reserve’s monetary policy framework has changed significantly over the past 50 years, in response to evolving conditions. This ability to dynamically change the implementation of monetary policy is a critical aspect of independence.
Excerpt: “For a central bank to prove the value of its tactical independence, it needs to evolve with changes in the economy and explain clearly why its policies are consistent with achieving the overarching mandate from the peoples’ elected representatives.”
- Takeaway: There are many analogies to central bank independence in modern life. We ask people to act our behalf, with independence, all the time.
Excerpt: “For example, lots of very smart people leave it to commercial airline pilots to get them to their destination, plotting the best course and flying the plane through any emergencies. But we expect the pilots to keep us informed, too.”