Fed’s Kugler becomes latest board member to advocate for continued agency independence

Count Federal Reserve Board Gov. Adriana Kugler as an advocate of continued agency independence, who Thursday said that condition is “fundamental” to the Fed achieving good policy.

In remarks to a meeting of the Latin American and Caribbean Economic Association and the Latin American and Caribbean Chapter of the Econometric Society, Montevideo, Uruguay (as the Albert Hirschman Lecture), Kugler said that “It has been widely recognized – and is a finding of economic research – that central bank independence is fundamental to achieving good policy and good economic outcomes.

“It is not sufficient by itself to achieve those goals, but, over time, it is almost always necessary,” Kugler said, referring to independence for the Fed and other central banks.

Kugler used inflation to make the case for central bank independence, which she defined as carrying out monetary policy insulated from pressures arising from other parts of government or elsewhere.

“Gaining control over inflation requires a commitment by society to accept the tradeoffs and sacrifices often needed, and it also requires deliberate and principled decision making by central banks,” she said. “Central bankers must both formulate their best judgment of the correct policies that will achieve a desired level of inflation and follow through by executing and maintaining those policies.”

She asserted that if central bank independence reduces inflation, it accomplishes that through credibility.

“If the central bank is credible about its longer-run inflation target, it would be a natural outcome that long-run inflation expectations will tend to be closer to the target than when that credibility is lacking,” she said. “And a central bank will be more credible if it takes actions that lead the public to be confident that the central bank is actively pursuing its stated goal.”

She said that, where there is central bank independence, “the role of national or jurisdictional governments is typically one of representing the public in specifying a mandate for the central bank and holding the central bank accountable by monitoring its performance and appointing central bank leadership.”

“In this arrangement, the public, through representative government, specifies the overall objectives that central banks should pursue,” she said.

Fed Gov. Adriana D. Kugler: Central Bank Independence and the Conduct of Monetary Policy