The Evolving Perception of Centralโข Bank Independence: โฃInvestorโค Concerns โadn the Potential for Co-ordination
Recent commentary โขsuggests aโ growing skepticism regarding the true โขindependence ofโฃ central banks,with some arguing the concept isโ largely illusory,notably in the โface of mounting governmentโ debt. Macro strategistโค Kabra, speaking to Risk.net, believes the Japanese yen isโฃ substantially โขundervalued, โperhaps by โ35-40%, attributing this โto the Bank of Japan’sโ cautious approach toโ rate hikes – โขa strategy seemingly โขinfluencedโ by the need to manage the country’s considerable debt burden.
This outlook aligns with a broader โคdiscussion about the impact of quantitative easing (QE) on central bank autonomy. Severalโ academics suggest the expansion of centralโ bank balance โคsheets during the QE era has, in fact, eroded their independence, leading Kabra to question the integrity of bondโ markets, stating, “Let’s lookโ at how many bonds โevery central โbank owns,โข and you tell me wich is the mostโข manipulated market.” Despite this, โฃthe US federal Reserve isโ generally viewed as being at the more autonomous end of the spectrum.
However, โฃothers โdismiss the customary notion of a โstrict separation between central banking and government policy – the โ”church and state” ideal – as unrealistic. Krishna Kumar,โ CIO at Goose Hollow Capital, calls theโ idea โof central bank โฃindependence “for the birds,” โnoting its relatively recent origins. the European Central Bank is the only major central bank established โwith independence as a foundational principle, while the Bank of England only gained freedom โfromโ Treasury controlโ in 1997.โ
Kumar points to instances ofโฃ co-ordination,โ such as the Federal Reserve’s recent decision to slow the pace ofโฃ balance sheet reduction, as evidence of ongoing government-centralโ bank interaction.โ This co-ordination, he argues, may become increasingly necessary as โdeveloped nations grapple with high levels of debt. He warns that โขconflicting policies – โa government issuing long-term โbonds whileโค the Fed shrinksโ its balance sheet – could destabilize bond markets, necessitating greater โalignment and, consequently, โaโฃ reduction in โคcentral bank independence. This scenario echoes โฃinvestor fears โคof “financial repression” โคidentifiedโข in Risk.net’s top investment โฃrisks for 2025.
The ancient precedent of the post-World War II era, โwhere the Federalโ Reserve โmaintained low interest rates to fund the warโ effort, further illustrates โคthis dynamic.While this period ultimately led to tensions and the 1951 treasury-Federal Reserve Accord โค- a reassertionโ ofโ central bank independence – it โฃhighlights the potentialโค for government influence during โtimes of economic โstress.
Despite concerns, most investors believe aโ drastic intervention, โsuch as a US management firing the Fed chair Jerome Powell, would trigger importantโ market disruption – higher borrowing costs andโข a weakerโค dollar. Though, โขsuch a move is โคwidely considered unlikely. While former President โขtrump’s attempts โto influence the Fed have been โฃnoted,the prevailing expectation is that these efforts will continue toโฃ be largely disregarded.
