Central banks need to tell everyone to suck it up
While monetary policy has an important role to play in combating economic downturns, central banks have assumed an outsized importance at the expense of other policy options, writes Dr. Michael Ivanovitch in a commentary for CNBC, arguing that central bankers need to push back on expectations that they will be “fixers of last resort.” Among other ill effects, their growing importance effectively allows politicians — and ultimately voters — to abdicate responsibility for difficult decisions in terms of fiscal and structural policy.
- Ivanovitch draws attention to the perennial issue of moral hazard, noting that investors are pumping money into overvalued assets with the expectation that central banks will always be there to keep economic wheels turning with lower interest rates. Political pressure on central banks to cut interest rates is only adding to the impression.
- With that in mind, Ivanovitch suggests that bankers push back with detailed arguments when economic indicators don’t warrant further rate cuts, and also remind the public and policymakers that other policy tools are still at their disposal, including taxes and public spending.
- There are also structural options, which can mean policies “to remove technical and institutional obstacles to the free functioning of demand-supply forces in labor and product markets.”
- Thus “the Fed’s public statements must explain its policy in terms of economic activity, employment and key inflation indicators… that should be the Fed’s ‘over-to-you’ message for the White House, the Congress, the financial markets and, most importantly, for American voters and taxpayers.”
- The same goes for the ECB, which has a duty to push back on fiscally conservative countries like Germany that refuse to use fiscal policy — meaning, spending money — to stimulate slower parts of the European economy.
- In a nutshell: “The Fed and the ECB should clearly communicate to the general public that monetary policy is only one of the instruments of economic management. That means that coordinated monetary, fiscal and structural policies are necessary to produce a steady and sustainable growth of demand, output and employment in an environment of price stability.”