Central bankers risk their independence

Central bankers and journalists will assemble for the virtual Jackson Hole conference later this week. Their agenda will be broad. The future path of quantitative easing, the health of the labour market, and other critical monetary and regulatory matters will command center stage. But we can also expect pronouncements on issues once considered the domain of elected politicians, including climate change, racial justice and inequality.
The emergence of central-bank commentary on hot-button political issues is a significant departure from the practice of just a generation ago. Central bankers who lived through the 1970s remembered the experience of high and volatile inflation. They saw independence as essential to
the ability of central banks to maintain economic stability. And this autonomy went hand in hand with clear goals and mandates, such as inflation targets.
The global financial crisis and its aftermath greatly expanded the role of central banks. Large-scale asset purchases — “quantitative easing” or “QE” — went beyond money creation and extended to allocating credit through the purchase of non-federal government instruments and private obligations such as corporate bonds. And the scale of money creation inevitably created a political interest in its continuation. The stock of assets purchased under QE now stands at 30% of gross domestic product in the US and 40% in the UK. The introduction of forward guidance encouraged the view that central banks could predict the future path of the economy, rather than react to the data as they emerged.
Amid widespread frustration with the inability of elected policy makers to address the critical issues of the day, influential voices — including politicians, economic luminaries and the general populace — increasingly called on central banks to step in. Central banks became “the only game in town.” Central bankers responded willingly, moving into the political arena. This began most notably with climate change and the formation of the Network for Greening the Financial System (NGFS). But it didn’t stop there. Central-bank officials now concern themselves with a wide array of policy issues, from racial justice to inequality, from education to public health. These are serious challenges to our societies. But the gravity of an issue is not the sole, nor even the most important, criterion for central-bank involvement. Some of society’s problems warrant a monetary response. Most do not.
It is true that many of the new issues attracting central-bank attention have economic implications. Clearly, pollution and its effects, including climate change and declining biodiversity, will affect the economy. But attempts to shoehorn these matters into the domain of monetary policy ask too much of central banks. In a world of radical uncertainty, their economists struggle to handle even their traditional responsibilities of economic forecasting. Recent inflation overshoots, following a decade of persistent undershoots, suggest a need for greater humility.
Central banks’ increasing focus on climate change is particularly odd. As the pandemic has shown, the financial system faces a range of tail risks ranging from cyberattacks to political instability around the world. But central banks have little expertise in any of these areas.

—Bloomberg