How do you proceed if you (as a central bank) want to increase the scope in which you are allowed to operate? And especially to pursue a policy that is even more harmful to the common man and has major consequences for financial markets. In any case, what you should not do is say that you want to.
What you should do is wrap the change in something that at least sounds as innocent as possible. And whenever possible, this should even be perceived by the outside world as a kind of penance. That's what some central banks have done recently. Personally, it worries me greatly for the (near) future.
Fed wants to evaluate monetary strategy
What is it about then? The Fed (US Central Bank) recently announced that it wants to evaluate its own monetary strategy in 2019. This not only sounds reassuring, but also as if the bank is taking matters into its own hands. Appearances are deceiving, because the Fed has announced that as part of that evaluation it will examine whether the bank's objectives need to be adjusted. And that's where it all becomes precarious.
In recent years, the bank has had difficulty keeping inflation around 2% per year. Everything was done and in the end it worked. However, then another problem arose. Inflation rose so quickly that the bank had to raise interest rates. The Fed is already doing that, but it should actually have done it a little faster and more (given inflation developments).
Show similarities
How useful it would be if the Fed's objective were similar to the mobile subscriptions of yesteryear. Do you remember when there were once subscriptions with (say 100) calling minutes per month, where you could carry over the unused minutes to the next month? This would suit the Fed, but also the other central banks.
If you saw inflation in 2015 at 0% (where you aim for 2%) and that also occurs in 2016, after which inflation in 2017 and 2018 will be around 1,5%, then you should actually say that you can aim for 2019% to 2020% inflation per year in 3 and 4. Why? Well, because you can carry over the unused inflation calling minutes from 2015, 2016, 2017 and 2018 to the next and subsequent year.
'Nominal gdp targeting'
The bad news, however, is that the law on central banks is not structured like that. The good news is that this can happen. The magic name for this is: 'nominal gdp targeting'. If central banks were instructed to target 5% nominal gross domestic product (GDP), that wish would come true. Nominal GDP is the sum of real growth and inflation.
Now suppose that the central banks no longer have to aim for 2% inflation but for a 5% increase in nominal GDP, which means that (if the growth of the economy is 1% in 1 year) the bank can do everything to increase prices by 4%. % to climb. This not only means keeping interest rates at 0% (which keeps savings rates low for a long time), but also buying up bonds on a large scale, resulting in bubbles on the markets. They will burst sooner or later, with all the negative consequences that entails; especially for the middle class.
If it were only the Fed that wanted to evaluate things, then we could still say that this is an exception. However, almost immediately afterwards the Canadian central bank reported the same thing. He indicated that he actually wanted a higher inflation target, but also wanted to shift the focus to the short term. In short: using interest to achieve short-term success, for which the bill is presented in the form of pain in the medium term. It goes without saying that politicians are happy to welcome such evaluations and changes.
The Eurozone
"But would it really have such far-reaching consequences?" I hear you thinking. "I mean, some words are being changed in the law here and there, is that so bad?" In that respect, an experience from the eurozone speaks volumes in my opinion. When the European Central Bank (ECB) was established, it was tasked with ensuring price stability (inflation below 2%, seen in the medium term).
The law prescribed that central bankers had to base their policy on 2 pillars: an economic one (analysis of economic developments) and a monetary one. This is because history shows that when a central bank allows money growth to become high, it is inevitable that inflation will become too high. In 2003, the European bank began evaluating its strategy and since then the monetary pillar has all but disappeared, allowing the bank to significantly increase the money supply.
The most significant consequence of that review was the adjustment of the definition of price stability. Since 2003 it has been 'inflation close to 2%'. Those words made a world of difference. When inflation in the eurozone fell to 1% in the last crisis, the ECB was quick to cut interest rates and buy government bonds (about €80 billion per month).
The reason? Inflation was too low; After all, 1% was less, but not close to 2%. If the definition had not changed in 2003, it would have been more difficult for the bank to lower the interest rate to 0% and keep it there for years. In short: the pension funds could perhaps have indexed the pensions every year and then saving would still yield something. This shows what consequences an innocent-sounding outcome of a central bank evaluation can have.
Democracy?
Finally: perhaps the strangest thing to me is that no one asks the question whether it is really so democratic that a group bankers (who have not been chosen) can determine on their own what the rules are. We do not let judges write the laws, but judge with those laws. It should be the same with central banks.