Populism and the Future of Central Banking

With populist movements gaining ground, their complaints about independent monetary policymakers could now change the relationship between central banks, treasuries, and legislatures. The question for 2017 is whether that would be a good thing, or whether central-bank independence should be defended against the coming attack.

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LONDON – Throughout 2016, populist movements in developed countries set their sights on central-bank independence. To the populist bull, unelected technocrats wielding policies that have political and distributional consequences may as well be waving a red cape.

In the United States, a bill seeking to audit the Federal Reserve – and thus to subject quotidian monetary-policy decisions to congressional review – was narrowly defeated in early 2016. And, during his campaign, President-elect Donald Trump accused Fed Chair Janet Yellen of politicizing Fed decision-making.

In Europe, the populist clamor against unelected European Union bureaucrats and the independent European Central Bank has grown louder; and in the United Kingdom, Labour Shadow Chancellor of the Exchequer John McDonnell has called for “democratic control” over interest rates, implying that the Bank of England’s monetary policy has been geared toward helping financial institutions.

With populist movements gaining ground, and even joining some governments, their complaints will, sooner or later, translate into policy proposals that could change the relationship between central banks, treasuries, and legislatures. A large question for 2017 is whether that would be a good thing, or whether central-bank independence should be defended against the coming populist attack.