SAN DIEGO — St. Louis Federal Reserve Bank President James Bullard issued stark warnings Friday about the "politicization" and "fiscalization" of monetary policy.
Bullard, a voting member of the Fed's policymaking Federal Open Market Committee this year, was particularly critical of the European Central Bank and its Outright Monetary Transaction program.
"Financial crisis aftershocks have introduced a 'creeping politicization' of central banking globally," he said in remarks prepared for delivery to a National Association for Business Economics seminar at the annual meetings of the Allied Social Science Associations.
"To the extent that central bank independence is weakened globally, macroeconomic stabilization policy will not be executed as well in the future as it has been since the mid-1980s," Bullard said. "This suggests more macroeconomic volatility ahead."
Bullard further warned that "fiscalization of monetary policy will tend to complicate the policymaking process substantially."
Bullard's prime example is the ECB and its OMT program, which he called "a fiscal-type operation" that "has altered the response of the ECB to the European recession."
The OMT program of buying sovereign debt of euro-area nations has been regarded as "successful," but it represents "fiscalization of monetary policy," he said. It asks the ECB to "take actions far outside the remit of monetary policy."
Bullard said "the analog in the U.S. would be a promise to purchase, or even monetize, state debt in exchange for the state maintaining a fiscal program considered prudent by the central bank. Assistance like this from a central authority to a region is best brokered through the political process in democratically-elected bodies."
"In Europe, the ECB is in essence substituting for a weak pan-European central government," he said.
While buying sovereign debt in a euro-area version of quantitative easing, the ECB is not using its ordinary monetary tools adequately, Bullard suggested.
"There has been a large macroeconomic development in Europe: Eurozone recession," he said. "Yet, little direct action has been taken by the ECB in response to the recession. The policy rate has not been significantly adjusted.
"One could argue that the monetary policy response to the European recession has been muted compared to more ordinary circumstances," Bullard went on, because "the monetary policy process has been bogged down by political wrangling over the OMT and other programs."
Bullard said the end result is that "by conducting a fiscal action, the central bank has been pulled away from its ordinary macroeconomic stabilization policy. Standard monetary policy has become wrapped up in the fiscal policy package and subject to the negotiations that surround that package."
But "this defeats one of the original purposes of central bank independence: Having a monetary authority that can react to macroeconomic shocks quickly and effectively."
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.