But in an era of floating exchange rates and fiat currencies, the value of a country’s money – and ultimately the living standards of the populations that use it – is determined by its ability to be credibly managed, with a stable foreign exchange value and free from erosion by domestic inflation.
In fact, the domestic laws which give statutory life to central banks in many countries prescribe some combination of price stability and maximum employment (and in some cases responsibility for the stability of the domestic financial system as well) as the monetary authorities’ objectives.
If central banks err on the side of slightly above-target inflation in order to ensure the economy is on solid footing, for example, that would be an entirely different question from whether or not the central bank should avoid policies that weaken the stock market and potentially hurt the political executive’s popularity. Getting it right, especially when balancing potentially conflicting policy remits, is in fact the crux of study and commentary on central banks.
Nevertheless, the consensus around central bank independence hasn’t had to envision the breadth and intensity of the current assaults from politicians and markets. It may very well be that we are entering an era in which that consensus goes unheeded by government leaders.
Central banks are not ignorant of the threats to their operational independence. In fact, the independence they do enjoy is bestowed upon them by political masters, and it can always be circumscribed or diminished – even to the point of being withdrawn altogether.
One way to mitigate the criticisms is for central banks to display their own political alacrity. They have taken steps in recent years to be more transparent and to stay above the fray, often while being the only policymaking bodies with the operational flexibility and tools to confront economic difficulties.
Chair Powell admitted in February Congressional testimony that the independence of his institution is a fragile thing, saying that Americans and the government “can hold us accountable.” This give and take is always present and financial market participants are mindful that central banks give just enough, lest more be taken away from them.
John Velis is an FX and global macro strategist at BNY Mellon Markets in New York.