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Central bank independence under threat from angry public, warns Fed boss Powell

Tim Wallace
Jerome Powell, right, said central banks must be as transparent as possible to keep their legitimacy in the eyes of the public. Mark Carney, left, said introducing a new digital currency is not on the Bank of England's agenda for now - Bloomberg

Voters do not trust public institutions and central banks must become as transparent and accountable as possible if they want to keep their independence, Federal Reserve chairman Jerome Powell has warned.

The most powerful central banker in the world told an audience of his peers and other financiers that “this is a challenging moment for central banking”.

“Opinion polls show that trust in government and public institutions is at historic lows,” he said at the Sveriges Riksbank, the Swedish central bank, which is celebrating its 350th year.

“In this environment, central banks cannot take our measure of independence for granted.”

Inflation has been low and predictable for the past quarter of a century, he said, but any complacency must be resisted.

Ed Balls: Bank of England needs less independence and more political oversight

“We must not forget the lessons of the past, when a lack of central bank independence led to episodes of runaway inflation and subsequent economic contractions,” Mr Powell said.

“For monetary policy, the case for central bank independence rests on the demonstrated benefits of insulating monetary policy decisions from shorter-term political considerations.”

Central banks’ emergency actions to address the financial crisis may have contributed to the deterioration of trust, Mr Powell said, as its complex and often unprecedented steps were “difficult to explain and justify to a sceptical public”.

As a result the Fed has sought to become more transparent, with more public explanations of its policies and their effects, for instance through its stress tests of the banks, and more meetings with ordinary people.

Independent central banks provide politicians with easy scapegoats

“In a democratic system, any degree of independence brings with it the obligation to provide appropriate transparency,” he said.

“In turn, transparency provides an essential basis for accountability and democratic legitimacy by enabling effective legislative oversight and keeping the public informed.”

Meanwhile Mark Carney told the same conference he is “open-minded” on the possibility of introducing a central bank digital currency in future.

However for now the Bank of England Governor said the technology behind cryptocurrencies is not sufficiently robust, and there is little demand for the product.

He said its introduction now would represent “a solution to a problem that doesn’t exist” and could look like “an example of central banks trying to get down with the kids”.