Are the World’s Largest Central Banks Independent?

The world’s largest central banks, including the U.S. Federal Reserve, the Bank of England and the Bank of Japan, are overseeing unprecedented easing programs. While the European Central Bank, unlike the BOJ or the Fed, has not purchased large amounts of sovereign debt, it could do so in the future by ramping up its Outright Monetary Transactions (OMT) program. That program allows the ECB to purchase sovereign government bonds on the secondary market, which would be expected to lower interest rates in the event of renewed turbulence in the euro zone. As part of its third quantitative easing program (QE3), the U.S. central bank has committed to maintain about $85 billion in monthly asset purchases. In Japan, the BOJ’s newly installed governor, Haruhiko Kuroda, recently announced purchases of ¥7.5 trillion in long-term government bonds each month, up from the current ¥3.8 trillion. The ramped-up easing program will also include investments in real estate investment trusts.


However, the substantial easing programs and the pressure some central banks have been facing from politicians to change their policies have raised questions about their independence. In other words: Are central banks enacting the sort of stimulus actions that sovereign governments can’t roll out because of fiscal concerns? Credit Suisse U.S. Economist and long-time Fed watcher Dana Saporta cautions against confusing coordination with subordination. Saporta adds that one noteworthy change brought on by the global financial crisis is the Fed’s commitment to maintain financial stability.


Click on the video to hear our full interview with Dana Saporta. Also, click here to listen to her recent outlook on the future of the Fed’s QE3 program.