Limits to Central Bank Independence

This editorial is a reminder that a central bank's independence is not absolute:

Editorial/ Bank of Japan, The Asahi Shimbun, Nov. 19: All of a sudden, senior government and ruling Liberal Democratic Party officials are speaking out against the Bank of Japan's monetary policy. Hidenao Nakagawa, chairman of the LDP Policy Research Council, noted: "The central bank needs to constantly coordinate its policy target with that of the administration. If the bank doesn't understand that, we ought to consider revising the Bank of Japan Law." On doing away with the policy of quantitative monetary easing, Prime Minister Junichiro Koizumi said: "It's premature. The price rise index ought to be above zero. We are still in a period of deflation." It is rare for Koizumi to comment on central bank policy. ... The ... government and LDP officials should not be blatantly meddling in the central bank's policy. Those officials ought to recall why the Bank of Japan Law was revised in 1998 to give it independence. The law had to be revised because the government and ruling party admitted they had put undue pressure on the central bank with the result it could not implement appropriate policy. The BOJ jeopardized its hard-won independence with its 2000 blunder. ...

In the United States, ... It is practically unheard of for any ranking public official to complain about Fed policy in public. ... The Bank of Japan's independence is a matter that could affect the nation's economic activity in real terms. The government is now trying to wield its influence over the central bank because it is afraid that higher long-term interest rates will bloat its bond payments, which in turn would set back fiscal rehabilitation plans. But basically, long-tern interest rates are tied to long-term economic and inflation forecasts. If the Bank of Japan is viewed as unable to resist government pressure and control inflation, that could cause long-term interest rates to rise. Politicians be warned: You may be inviting misfortunes if you continue to loudly proclaim what the Bank of Japan should be doing.

Politicians, economists, lots of people complain about Fed policy. The hope is that none of them believe it has any influence whatsoever on the Fed, even if, or perhaps particularly if, politicians threaten to take away or limit the Fed's independence. Is this relevant for the U.S.? Some recent examples include a call from Senators Dorgan and Reid in 1996 for the non-monetary activities of the Fed to be subject to budget oversight giving them the power of the purse string. In addition, in 1975 congress required the Fed to announce its money growth targets. This was followed by the Full Employment and Balanced Growth Act in 1978 requiring the Fed to explain how its monetary plans are consistent with the plans of the president. In effect, though, this has had little effect on Fed behavior.