The AFR's Alan Mitchell has a good article today embracing my long-held concerns about the willingness of developed-world central banks to remain politically independent and stick to their inflation targets:
Have we seen the heyday of independent central banks? The major money-printing central banks have seen their balance sheets expand to more than 30 per cent of gross domestic product in the case of the European Central Bank, and about 20 per cent of GDP in the cases of the United States Federal Reserve and the Bank of England. And there may be a good deal more money-printing still to come...
Kenneth Rogoff, the former chief economist at the International Monetary Fund, has argued for “a sudden burst of moderate inflation” to help reduce the developed countries’ collective public debt burden. But would the developed world’s independent central banks go along with that? Allan Meltzer of the Carnegie Mellon University in Pittsburgh believes the Federal Reserve would. “They usually say that they have the tools to stop inflation, and I agree with that,” he says. “The question is not the tools, it’s the courage. When the administration, the Congress, the business community and the labour unions all tell them there’s too much unemployment, you can’t do it now, will they have the guts to go ahead? I don’t think so.” Meltzer sees a surge in inflation coming in the next few years, as he explained to the US House Committee on Financial Services. The Federal Reserve, he argued, does not have a coherent, operational plan to reduce the excess bank reserves it has created in its quantitative easing of monetary policy. “Federal Reserve officials suggest that it can get banks to hold most of the excess reserves by raising the interest rate on reserves. I have asked them repeatedly how high the rate would have to go. Silence.”
