IMF: 'Politicians should not interfere with central banks'

The International Monetary Fund (IMF) Warns for the 'dangerous consequences' of politicians interfering in central bank policy. The organization cites as an example the situation in the United States, where the president is calling for an easing of monetary policy. Last week, President Trump said that the Federal Reserve should lower interest rates and buy bonds again to support the economy.

"Undermining the independence of the central bank is dangerous", said Tobias Adrian of the IMF's monetary policy and capital markets department. He emphasized that the Federal Reserve is set up as an independent body, with its governors and chairman appointed for a long term. "It is strongly rooted in the institution that she does not have to listen to the wishes of politicians"Adrian stated in an interview in Washington.

More monetary stimulus

U.S. President Trump has criticized the Federal Reserve's monetary policy on several occasions. He believes the central bank is not doing enough to support the US economy. He has also nominated two candidates for the Governing Council of the Federal Reserve, in order to exert more influence. One of those candidates is Stephen Moore, who recently won a plea for an interest rate cut.

Throughout history, various governments have tried to take control of the central bank. In many cases, this led to hyperinflation, as governments instructed the central bank to finance the budget deficits. Monetary policy is then used as a tool to maintain a bad fiscal policy. In the end, this always goes wrong, because at some point the population loses confidence in money and the government. People then flee into other currencies, tangible possessions and precious metals such as gold and silver.

Unconventional policies are becoming the new normal

Since the outbreak of the financial crisis in 2008, central banks have taken several unconventional measures to support the economy. For example, government bonds were bought on a large scale, making it easier for governments to borrow. Extremely low interest rates have led to higher debt levels in advanced economies, making it difficult to raise interest rates from current levels.

The IMF wrote in its latest Global Financial Stability Report that accommodative monetary policy and accommodative borrowing conditions will further increase already high debt levels in advanced economies. This increases the threat of a more severe correction in the future, according to the IMF.

According to Adrian, policymakers need to prepare for a world in which unconventional monetary policy becomes the norm. This means that measures such as negative interest rates and the purchase of government bonds, corporate bonds or possibly even shares will become the 'new normal'. Still, he doubts that central banks will make interest rates much more negative, as that could potentially trigger a flight to cash.