Former Federal Reserve Vice Chairman Stanley Fischer was invited to give a speech, and Bank of Japan Governor Kazuo Ueda, a protégé of the speaker, is currently under immense political pressure from two sides: domestically, politicians led by Sanae Takaichi continue to pressure Japan to maintain low interest rates in order to support fiscal and economic growth through easing; internationally, U.S. President Bessenter is both restricting Japan from selling large amounts of U.S. Treasury bonds to avoid impacting the U.S. Treasury market and U.S. financing, and urging the Bank of Japan to raise interest rates to boost the yen.

Meanwhile, the Federal Reserve is also facing a similar predicament. The White House is demanding lower interest rates, while politicians hope to boost employment and reduce the burden of paying interest on huge national debt through easing, and are constantly publicly pressuring the Federal Reserve to loosen monetary policy.

Multiple realities intertwined: the underlying reasons why the central bank frequently encounters intervention.

Central bank independence relies on both legal provisions and market practices for protection. During Trump's presidency, he frequently put pressure on Powell and interfered with interest rates through public opinion, thus continuously breaking this convention. The Bank of Japan was also influenced by the Takashi City government, for example, by delaying interest rate hikes.

Most national governments prefer a loose environment: however, the current global situation is that developed economies have high debt levels, aging populations and geopolitical spending are increasing interest costs, governments are afraid that raising interest rates will increase debt repayment pressure, and they naturally lobby central banks to cut interest rates and loosen monetary policy.

This is mainly due to the reversal of the inflationary environment under the changing times: the low-cost benefits brought by globalization from 1990 to 2019 have faded, and trade barriers and the relocation of industrial chains have raised the central price level;

External shocks are shifting blame: the pandemic and geopolitical conflicts have driven up energy and commodity prices, reduced residents' incomes, and increased public discontent; coupled with the rise of populism fueled by fragmented information on social media, politicians are accustomed to blaming the central bank for economic problems and using public opinion to hijack monetary policy.

With declining public trust in technocratic institutions and increasing political polarization, central banks, whose responsibility is long-term macroeconomic control, have naturally become prime targets for administrative intervention and populist attacks.

Faced with pressure, what is the central bank actually concerned about, and what should it do?

Drawing on the practical experience of previous U.S. central bank governors, Fisher concluded that central banks' ability to resist intervention and safeguard their independence boils down to three core things: anchoring legal objectives, making sound professional decisions, and improving public communication.

Firstly, price stability is the primary, and even the only, statutory objective of central banks worldwide. Although the Federal Reserve balances its dual objectives of price stability and employment, price stability is a prerequisite for achieving sustainable employment. This explains why the Fed's policy mistake of raising interest rates too late in 2021 was due to an excessive focus on employment recovery and a significant weakening of its early warning system for inflation.

Volcker, Greenspan, and Bernanke, three generations of Federal Reserve chairs, consistently anchored their policies around inflation , refusing to be bogged down by additional goals such as climate change and income distribution.

This also explains why, despite the overall decline in the European economy, the European Central Bank still turned to raising interest rates; ultimately, it comes down to the unique importance of prices.

Secondly, policies should not blindly follow models, but should rely on macro narratives and be flexibly adjusted according to reality: Volcker switched from monetary aggregate control to interest rate control in a timely manner, Greenspan adapted to the productivity cycle and refused to cut interest rates but ultimately achieved a soft landing for the economy, and Bernanke quickly turned to liquidity relief during the crisis.

The central bank has improved the construction of its internal research team and optimized decision-making based on cutting-edge research; it has standardized the conditions for using unconventional tools such as bond purchases, clarified that asset purchases are only for stabilizing the currency and the market, and prevented disguised fiscal financing, so as to reduce external criticism by fulfilling its duties effectively.

Finally, public opinion is the underlying guarantee of the central bank's independence under a democratic system . From Volcker's careful control of transparency and the public interpretation of key policies, to Greenspan's immediate disclosure of interest rate decisions, and then to Bernanke's regular press conferences, the Federal Reserve has continuously improved its communication system.

The Federal Reserve uses forward guidance flexibly, using it to guide expectations of easing during the zero-interest-rate phase, and relying on policy narratives to manage the market in the normal interest rate environment; it marks uncertainties in forecasts and avoids absolute predictions, while strengthening communication with Congress and the general public. For example, when Powell faced unfounded accusations from the president, he adhered to data pricing and spoke to the public with reason and evidence, thus building social support for the central bank's independence.

How the Bank of Japan and the Bank of Japan will resolve political pressure is a key point of interest in the near future.

Both the Federal Reserve and the Bank of Japan are currently under intense political pressure, and Fischer's theories are being put into practice in the monetary policies of both countries.

With high levels of US government debt, the White House has repeatedly pressured the Federal Reserve to cut interest rates to serve short-term political goals.

Whether the Federal Reserve can adhere to its dual statutory mandate, withstand public opinion interference, set interest rates based on inflation and employment data, continuously warn of the risks of unsustainable fiscal policy, and not be swayed by political demands in the general direction of monetary policy remains to be seen.

Whether Kazuo Ueda will learn from the lecture experience remains to be seen, and he may proceed gradually between domestic demands for easing and US policy constraints: withstand the pressure of interest rate cuts from Sanyo and Kaohsiung, and steadily exit negative interest rates and YCC based on wage and inflation data;

While taking into account the demands of the United States, we will moderately control the pace of reducing our holdings of US Treasury bonds, avoid large-scale bond sales to save the yen, and gradually improve the exchange rate through the normalization of monetary policy.

Both share a common focus: whether to remain steadfast in their core objective of stabilizing prices, to deliver the results of regulation through professional policies, and to regularly communicate with the outside world to explain the policy logic. It is worth noting that Warsh is preparing to reduce communication between the Federal Reserve and the outside world, which actually ignores the role of public opinion in supporting the independence of the Federal Reserve.

Summarize:

In short, this article summarizes the underlying logic of central bank operations. The reason why the independence of central banks such as the Federal Reserve is greatly threatened by the government is that the economy is not good enough, resulting in too much debt that cannot be repaid.

Many decision-making problems stem from underestimating the significant impact of inflation. Another issue is the lack of flexibility in the central bank's response. While raising interest rates is sometimes necessary to reduce inflation, during Glingspan's era, the significant increase in productivity meant that interest rate hikes were unnecessary, and inflation was ultimately brought down.

As traders, should the Federal Reserve raise interest rates in the face of inflation and productivity gains? Perhaps we can learn from Greenspan's experience.