Do-It-All Central Banks Risk Rates Flexibility With New Mission
Central bankers are engaged in the most sweeping rethink of their role in decades, spurred by the success of tight collaboration with governments in countering the pandemic crisis and a new political reality of increased demands on monetary policy makers.
The Federal Reserve, European Central Bank and emerging market counterparts like Bank Indonesia are among those that enabled fiscal authorities to ramp up emergency spending without driving borrowing costs up, through large-scale bond purchases.
As the crisis recedes, many policy makers favor keeping their expanded role in shaping economies and even broadening it further -- to incorporate social goals such as climate change and curbing inequality. The new pact has been enabled by sustained low inflation in recent years, any change to which could again shift policy makers’ views.
As governments expand social safety nets, the growing public debt loads will make it challenging for central banks to shrink their balance sheets or attempt to return interest rates to pre-crisis levels.
The new approach in one sense takes central banks back to their original mission more than a century ago, which focused more on the economy than on consumer prices.
“We are very far removed from the political economy of the 1980s and 1990s that prized delegating power to central bankers to quash inflation,” said Sarah Binder, a senior fellow at the Brookings Institution. “In the wake of the financial crisis and pandemic, and political demands for more activist central banks, they have returned to their roots -- fighting crises and helping to restore economic growth.”
Benefits from more active central banks could include higher sustained employment over time, along with greater progress on nurturing green finance. But some caution that a greater political role could make it harder for monetary policy makers to tighten their stance in the face of escalating inflation or asset-bubble risks.
For now, central bankers seem happy about their partnership with big-spending governments and broadened objectives. Deutsche Bank AG analysts note a jump in mentions of “inequality” in speeches by central bankers, a shift from their previous focus on inflation.
“Recent years have seen central banks increasingly enter the debate on numerous other topics including fiscal policy, social justice, race, gender issues, climate change and inequality,” Deutsche Bank analysts wrote earlier this week. “It does show how central bank power and influence has changed and also how they seem to be giving governments cover to spend on these issues.”