January 4, 2013 / 10:56 PM / 5 years ago

UPDATE 1-Fed's Bullard: Central banks have let independence slip

By Alister Bull and Ann Saphir

SAN DIEGO, Jan 4 (Reuters) - The world’s central banks have sacrificed some of their cherished independence as a result of fiscal-like policies undertaken to repair the damage of the global financial crisis, a senior Federal Reserve official said on Friday, calling the ECB one of the worst offenders.

James Bullard, president of the St. Louis Federal Reserve Bank, described the European Central Bank’s bond-buying program as a “fiscalization” of monetary policy, and said it had weakened the ECB’s response to the European recession.

“Why? By nearly all accounts, the monetary policy process has been bogged down by political wrangling over the OMT and other programs,” Bullard said at the annual meeting of the American Economic Association.

The OMT, or outright monetary transaction program, is the ECB’s bond-buying program that allows for potentially unlimited interventions for ailing states.

The Fed has also been accused of straying into fiscal policy territory, which is supposed to be the exclusive preserve of elected politicians in the United States, via a massive bond- buying program that has ballooned the size of its balance sheet.

John Taylor, author of the influential Taylor Rule of monetary policy governing the relationship between economic slack and inflation, has been one of the most outspoken of these critics and sat on the panel with Bullard.

Other panelists include Fed historian Allan Meltzer, another fierce critic of the recent actions of the U.S. central bank, as well as former Fed Vice Chairmen Donald Kohn and Alan Blinder.

Bullard said abandoning a rules-based approach to monetary policy, and getting sucked into actions outside their remit, was leading to the “creeping politicization” of central banking globally -- something that would deliver disappointing economic results.

“The macroeconomic performance of nations with politicized central banks has historically been quite poor,” said Bullard, a voting member of the Fed’s policy-setting committee this year.

Hawks fear the unprecedented efforts of the U.S. central bank to spur hiring and economic growth will eventually lead to higher inflation that will be extremely painful to curb.

The Fed last month voted to maintain mortgage-backed and Treasury bond purchases at an $85 billion monthly pace, and to keep expanding its balance sheet through this policy of so-called quantitative easing until it sees a substantial improvement in the outlook for the labor market.

It also committed to hold interest rates near zero until unemployment declined to 6.5 percent, provided inflation remained beneath 2.5 percent. The Labor Department reported that U.S. unemployment remained at 7.8 percent in December.

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