Welcome to the Finfacts Blog

Monday, September 24, 2007

President Sarkozy calls for increase in European Central Bank key interest rate!!!

French President Nicolas Sarkozy has been baiting his compatriot Jean-Claude Trichet, European Central Bank President in recent months to cut interest rates and give politicians a greater role in ECB decision making.

Ten years ago, they crossed swords when Sarkozy was Budget Minister and Trichet was President of the Banque de France.

The above headline is a joke because it would never happen.

Former Federal Chairman Alan Greenspan says in his book The Age of Turbulence (click for excerpt):

The Federal Reserve's pre-1979 track record in heading off inflationary pressures was not a distinguished one. In part, that earlier history was a consequence of poor forecasting and analysis, but it also reflected pressures from populist politicians inherently biased toward lower interest rates. During my eighteen-and-a-half-year tenure, I cannot remember many calls from presidents or Capitol Hill for the Fed to raise interest rates. In fact, I believe there was none. As recently as August 1991, Senator Paul Sarbanes, in response to what he considered intolerably high interest rates, sought to remove voting authority on the FOMC [the board that controls the federal funds rate, the primary lever of monetary policy] from what he perceived were the "inherently hawkish" presidents of the Federal Reserve banks. Interest rates declined with the 1991 recession, and the proposal was shelved.

I regret to say that Federal Reserve independence is not set in stone. FOMC discretion is granted by statute and can be withdrawn by statute. I fear that my successors on the FOMC, as they strive to maintain price stability in the coming quarter century, will run into populist resistance from Congress, if not from the White House. As Fed chairman, I was largely spared such pressures because long-term interest rates, especially mortgage interest rates, declined persistently throughout my tenure.

It's a great argument for central bank independence to keep in mind that politicians would never call for higher rates despite the justification.

Sarkozy tells ECB to follow Fed and cut rates; Merkel and Trichet strongly defend the central bank's independence

0 Comments:

Post a Comment

<< Home