Central banks are setting new expectations for monetary policy that may be hard to reverse as they slide deeper into the realms of fiscal policy.
To save their economies from debt crises or slow growth, the Bank of Japan is uniting with a new government by aiming to lift inflation to 2 percent by 2015, and the European Central Bank stands ready to purchase bonds of stressed nations. The Bank of England now has more room to ignore price pressures and is discussing with politicians how to ease credit further, while the Federal Reserve has extended more than $1 trillion worth of unprecedented credit to a single industry: housing.
The defense for activism is that monetary authorities need to protect their inflation goals from the possibility of Japan- style disinflation if governments don’t boost demand. The risk is they’re left doing the work of those governments — or even financing them, creating precedents they may be pressured to extend or repeat in the future.
“Central banks have to be very careful in what they’re doing,” Axel Weber, chairman of UBS AG, told Bloomberg Television on March 27. “There is a challenge that their independence may be undermined simply because they’re getting closer to fiscal policy and politics.”
Weber resigned as president of the Bundesbank in 2011 partly because of his opposition to the ECB’s purchase of sovereign assets.
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