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Are Independent Central Banks Passé?

The fear among monetary policymakers that governments will reassert control over interest rates is exaggerated. Instead of bemoaning the surge of comment and challenge, central banks need to raise their game, enhance their transparency, and get better at explaining and justifying their actions and decisions.

LONDON – US President Donald Trump’s decision to nominate economist Judy Shelton for one of the vacant positions on the Federal Reserve Board has put the future of central bank independence back on the agenda. Shelton has cast doubt on the desirability of, and legal basis for, Fed independence, saying last year, “I don’t see any reference to independence in the legislation that has defined the role of the Federal Reserve.” And she has argued for “a more coordinated relationship with both Congress and the President.” If Fed policy were “coordinated” with Trump, then it is fairly clear who would be calling the shots.

Of course, one new Fed governor could not upturn decades of practice. But there are suggestions that if appointed, Shelton might replace Jay Powell when his term comes up for renewal in 2022, leaving a fox in charge of the chicken coop.

It is not only in the US that central-bank independence is under threat. In Turkey, President Recep Tayyip Erdoğan fired his governor last year, saying that “we told him several times to cut interest rates,” but he did not oblige. In India, the government asked the Reserve Bank to hand over some of its reserves, and Governor Urjit Patel resigned “for personal reasons." A few months earlier, his key deputy had directed a broadside at Prime Minister Narendra Modi’s administration: “governments that do not respect central bank independence will sooner or later incur the wrath of the financial markets.”

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