Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 323

Central banks risk losing their feted ‘independence’

William Martin is the longest-serving Federal Reserve chief, serving from 1952 when Harry Truman was President to 1970. A few years into the role, Truman saw Martin on a street. The President from 1945 to 1953 stared at Martin, called him a "traitor" and walked away. Martin’s betrayal? He prioritised a successful fight against inflation, then running at an annualised 21% in 1951, rather than help Truman fund the Korean war by ensuring Washington could borrow at 2.5% or less.

US Presidents versus the Fed

Lyndon Johnson, the fourth of Martin’s five Presidents, got frustrated with him too. Johnson enacted fiscal stimulus in 1964 only to see the Fed resist his bullying to keep interest rates low. In 1965, Johnson summoned Martin to his Texas ranch where the President “shoved him around his living room, yelling in his face: ‘Boys are dying in Vietnam and Bill Martin doesn’t care.’” When Martin’s final term ended, inflation was 6% and heading to double digits.

Now President Donald Trump is treating the Fed with similar disrespect. Trump has publicly criticised the “going loco” Fed led by “clueless” “enemy” Jerome Powell about 50 times since mid-2018. The worry is that Trump is just another menace to the practice whereby central banks set monetary policy to meet inflation and other targets supposedly free of political pressure.

Bloomberg counts that 17 central banks faced political interference in 2018.

Many forces are combining to weaken the autonomy of central banks, such as:

  • Populists are targeting central banks because the GFC discredited the neoliberal framework of which their independence is a part.
  • Central banks have been given more tasks, often bank supervision, that come with controversies.
  • Central bankers are commenting on politically sensitive topics such as climate change and gender quotas.
  • Their asset-buying programs have boosted inequality by inflating asset prices (even when conceding such tactics staved off recessions).

But two other reasons stand out that point to the trend intensifying because they relate to the merits of independent monetary policy as a way to manage economies.

The first is the raison d'être for independent central banking is waning; low inflation means politicians have lost their incentive to outsource the blame for higher interest rates.

The second is that orthodox monetary policies are exhausted, and people realise monetary tools can’t be radicalised much more because they promote risks, namely, they inflate asset prices, hinder lending and squeeze bank profits (which increases the risk of financial instability). To overcome this failure of monetary policy to fire sustainable growth, policymakers are pondering fiscal solutions that would dilute the autonomy of central banks.

Japan’s experience shows how political and economic conditions can force action that curtails central bank freedom. Many argue the Bank of Japan lost its autonomy in 2013 when it became part of Prime Minister Shinzo Abe’s drive to refloat Japan’s deflation-ridden economy. A central feature of ‘Abenomics’ is it blurs the distinction between monetary and fiscal policies, which were separated to stop the inflation-prone practice whereby central banks bought government bonds directly from Treasuries to fund fiscal deficits.

Central bank autonomy

As Japan’s fight against deflation shows, the weakening of central bank autonomy can be an appropriate policy response. But the loss of autonomy could come at a cost, especially if it’s judged to be due to political pressure rather than economic circumstances. The belief that central banks were above the political fray reduced the level of uncertainty in asset prices and instilled public faith that inflation would stay tame, fiat currencies would hold their worth and central banks would act for the common good. If central bank autonomy were to erode, such investor and public confidence could be hard to restore.

To be sure, most central banks only enjoy a ‘quasi independence’. Central banks are entwined in politics because they form part of the executive and they often cooperate with Treasuries. Lawmakers set goals for central banks that can be revised any time. They make central bankers report to parliaments. Many central bank leaders need to maintain public and parliamentary support to ensure their reappointment. The record of ‘apolitical’ central banking has blemishes. The biggest are the global financial crisis and the ECB’s rate increases of 2010 that intensified the eurozone debt crisis.

Whatever their errors or the degree of autonomy, granting central banks independence was an apt political and policy solution when inflation was a threat. Today’s low-inflation, low-growth and high-debt world will likely call on fiscal remedies that erode central-bank autonomy.

As policymakers turn to fiscal policy and executive fiat to promote sustainable more-equitable growth, central bankers might morph into public servants whom Truman would consider loyal and to whom Johnson would be friendly. But investors and the public might trust them less, especially if the loss of autonomy occurs while Trump is tweeting against the Fed.

 

Michael Collins is an Investment Specialist at Magellan Asset Management, a sponsor of Cuffelinks. This article is for general information purposes only, not investment advice. For the full version of this article and to view sources, go to: https://www.magellangroup.com.au/insights/.

For more articles and papers from Magellan, please click here.

 

RELATED ARTICLES

Will the RBA cut rates before the Fed?

Druckenmiller on the biggest mistake in the history of the Fed

Why we believe bonds are now beautiful

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Latest Updates

Planning

Will young Australians be better off than their parents?

For much of Australia’s history, each new generation has been better off than the last: better jobs and incomes as well as improved living standards. A new report assesses whether this time may be different.

Superannuation

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Investment strategies

A steady road to getting rich

The latest lists of Australia’s wealthiest individuals show that while overall wealth has continued to rise, gains by individuals haven't been uniform. Many might have been better off adopting a simpler investment strategy.

Economy

Would a corporate tax cut boost productivity in Australia?

As inflation eases, the Albanese government is switching its focus to lifting Australia’s sluggish productivity. Can corporate tax cuts reboot growth - or are we chasing a theory that doesn’t quite work here?

Are V-shaped market recoveries becoming more frequent?

April’s sharp rebound may feel familiar, but are V-shaped recoveries really more common in the post-COVID world? A look at market history suggests otherwise and hints that a common bias might be skewing perceptions.

Investment strategies

Asset allocation in a world of riskier developed markets

Old distinctions between developed and emerging market bonds no longer hold true. At a time where true diversification matters more than ever, this has big ramifications for the way that portfolios should be constructed.

Investment strategies

Top 5 investment reads

As the July school holiday break nears, here are some investment classics to put onto your reading list. The books offer lessons in investment strategy, financial disasters, and mergers and acquisitions.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.