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Chapter 27 Central banks: the "nerve centers" of the financial system (2)
The independence of the Federal Reserve ensures that it can be free from political pressure from the government or Congress when making monetary policy decisions.As politicians, the president and congressmen aim to be re-elected, which is to cater to the opinions of voters. Voters are often short-sighted and only value the immediate economic prosperity, but rarely think about the inflationary pressure that this prosperity will cause in the future. .Therefore, they generally prefer low interest rates, which stimulate the economy, to higher interest rates.As far as the president is concerned, the economic prosperity and low unemployment rate before the general election are beneficial to his re-election.Therefore, before the general election, they will choose policies to stimulate the economy, and after they are elected, they will implement austerity policies to curb inflation.That said, when economic policy, including monetary policy, serves politics, policy itself has the potential to be a source of economic instability.

With the development of history, the Federal Reserve is no longer just a private bank. Its status as a central bank is becoming more and more stable, and it is more and more inclined to play a role in regulating economic stability.In the battle to defend the independence of the Federal Reserve, people saw the importance of maintaining the independence of the central bank.The independence of the central bank refers to the degree of autonomy of power, decision-making and action that the central bank has given by law or actually possessed when performing its duties.

The independence of the central bank is more concentratedly reflected in the relationship between the central bank and the government. This relationship includes two meanings: one is that the central bank should maintain a certain degree of independence from the government; the other is that the central bank is relatively independent of the government. .

In recent years, strengthening the independence of central banks has become a global consensus and trend.Nouriel Roubini, an economist at New York University, pointed out that the boundary between the central bank and the government is becoming more and more blurred. Although inflation is the last thing the government can resist, the loss of the central bank's independence and the clear boundary between the government and the national economy are of great significance to the national economy. , will be more dangerous.

Central bank independence means that monetary policy is not influenced, directed or controlled by other government departments.In a broad sense, the independence of the central bank includes two meanings: one is the independence of the central bank’s goals, that is, the central bank can determine the ultimate goal of monetary policy by itself; the other is the independence of the central bank’s policy tools, that is, the central bank can use monetary policy on its own tool.

The purpose of promoting the independence of central bank policy is to liberate the central bank from short-term and short-sighted political pressure.Independence contributes to a central bank's reliability in achieving price stability, among other benefits.

The degree of central bank independence depends not only on a series of observable factors, such as legal differences, but also on some unobservable factors, such as informal arrangements of other government departments.

Therefore, to ensure the independence of central bank policy, the following points need to be done:
First, the premise is that the central bank has the final decision-making power over monetary policy;

Second, members of the Monetary Policy Committee have a long term of office and limited opportunities for reappointment, which is an effective guarantee for the smooth implementation of operational independence by the central bank.

Third, excluding the central bank from government work assignments ensures the independence of monetary policy operations.

Fourth, ensure that the central bank does not directly participate in the performance of national debt.

Interest rate policy: "Four or two to pull a thousand catties"

Since the beginning of 2007, the People's Bank of China has raised the benchmark interest rates for RMB deposits and loans five times.Among them, the one-year benchmark deposit rate has been raised by 1.35 percentage points, and the one-year benchmark loan rate has been raised by 1.17 percentage points. At the end of 2007, the central bank issued a report that the cumulative effect of interest rate policy gradually emerged: first, the moderate increase in financing costs is conducive to the reasonable regulation of money and credit supply, and restrains excessive investment; Stabilize social inflation expectations.In the case of rising prices, the central bank will increase the level of deposit returns and strive to make the real interest rate positive, which will help protect the interests of depositors.According to the household savings questionnaire survey, the rate of decline in residents' willingness to save has slowed down significantly. Under the current price and interest rate levels, the percentage of residents who think "more savings" is the most cost-effective, with a decline of 5.6 in the first, second, and third quarters , 4 and 0.9 percentage points, the range is significantly reduced.In the third quarter, the downward trend in the balance of savings deposits was eased to a certain extent.In the process of raising the benchmark interest rate of RMB deposits and loans five times, the People's Bank of China moderately narrowed the deposit and loan spreads of financial institutions. The spreads of the one-year benchmark deposit and loan interest rates were 3.60%, 3.51%, and 3.51% respectively after each interest rate adjustment. , 3.42%, 3.42%, and the interest rate spread gradually narrowed from 3.60% at the beginning of the year to 3.42%, with a cumulative reduction of 0.18 percentage points.

The central bank said that the cumulative effect of interest rate policy has gradually emerged.

Interest rate policy is an important part of monetary policy and one of the main means of monetary policy implementation.According to the needs of monetary policy implementation, the central bank uses interest rate tools in a timely manner to adjust the interest rate level and interest rate structure, thereby affecting the supply and demand of social funds and achieving the established goals of monetary policy.An increase in interest rates will help absorb deposits, curb liquidity, curb investment enthusiasm, control inflation, and stabilize price levels; lower interest rates will help stimulate loan demand, stimulate investment, and stimulate economic growth.When using the economic lever of interest rate, we must consider its pros and cons. When and how much to adjust is an art.Take Japan’s zero interest rate policy during its 10-year long recession as an example:

In the early 20s, after the collapse of the bubble economy, a large number of loans could not be repaid, resulting in a large number of non-performing assets for banking institutions, and the Japanese economy fell into a long-term depression.A large number of small and medium-sized enterprises have closed down due to insufficient capital turnover, which has affected small and medium-sized banks and financial institutions. In order to stimulate economic recovery, the Japanese government has expanded investment in public utilities and issued additional national bonds every year, causing the central government and local governments to be heavily in debt and on the verge of financial collapse. , the country can hardly use fiscal levers to adjust the economy.In order to prevent further deterioration of the situation and stimulate economic demand, the Bank of Japan implemented a zero interest rate policy in February 90. In August 1999, the Japanese economy experienced a short-term recovery, and the Bank of Japan lifted the zero interest rate policy for a time. In 2, the Japanese economy fell into a trough again. In March 2000, the Bank of Japan began to shift the main goal of financial adjustment from adjusting short-term interest rates to "financing volume goals", and at the same time resumed the actual zero interest rate policy again. On July 8, 2001, the Bank of Japan lifted the five-year and four-month zero interest rate policy and raised the short-term interest rate from zero to 2001%.The lifting of zero interest rates also marks the beginning of a significant recovery in the Japanese economy.

When the economy fell into a trough, the implementation of the low interest rate policy reduced the debt burden of enterprises and provided sufficient funds for the market, but its negative impact cannot be ignored.For example, the drop in market interest rates has led to a drop in deposit rates, causing savers to suffer certain losses and directly affecting the increase in personal consumption; in addition, short-term funds are readily available, which has contributed to the inertia of some financial institutions.Under the low interest rate policy, not to mention the implementation of securitization and the development of derivative financial products by financial institutions, even the profit margins of traditional deposit and loan business are very small, especially the insurance industry has encountered difficulties in operation.Therefore, too low interest rates have deprived financial institutions of the internal motivation to expand their business and develop aggressively.What's more serious is that the policy of low or even zero interest rates means that Japan has less and less room to use financial means to stimulate the economy.

The interest rate tools adopted by the central bank mainly include: 1. Adjustment of the central bank’s benchmark interest rate, including: re-lending rate, which refers to the interest rate adopted by the People’s Bank of China to issue re-loans to financial institutions; The interest rate used for rediscounting discounted bills with the People's Bank of China; the interest rate on deposit reserves refers to the interest rate paid by the People's Bank of China to the statutory deposit reserves deposited by financial institutions; the interest rate on excess deposit reserves refers to the interest rate paid by the Central Bank to financial institutions The interest rate paid on the part of the reserve that exceeds the statutory deposit reserve level. 2. Adjust the statutory deposit and loan interest rates of financial institutions. 3. Formulate the floating range of deposit and loan interest rates of financial institutions. 4. Formulate relevant policies to adjust various interest rate structures and grades, etc.

Different countries have different interest rate standards.The leaders of the People's Bank of China once used the image metaphor of "oranges cannot be compared with apples" to explain that the connotation and pricing mechanism of interest rate measures in various countries are different.Affected by the financial crisis, in 2009 many western countries, like Japan in the past decade, began to implement zero interest rate policy.Western countries are calling for China to implement a zero interest rate policy.Why is this?

Because interest rates have an important impact on the domestic exchange rate and the exchange rate of other countries.Interest rate is the product of the relationship between money supply and demand. Increase the amount of money, and the money in the market will increase, and the supply will exceed demand, resulting in a decline in interest rates; conversely, reducing the amount of money, the currency in circulation in the market will decrease, and the supply will exceed demand, and the interest rate will increase.Taking China and the United States as examples, if China increases the supply of money and lowers interest rates, and assuming that the U.S. interest rate remains unchanged, the RMB will depreciate against the U.S. dollar in the foreign exchange market; depreciate.Therefore, the interest rate policy of a country will not only affect the interests and economic development of its own people, but also affect the economy of other countries through the exchange rate.

Exchange rate adjustment: internal and external considerations

The strong U.S. dollar policy since 1995 actually reflects the real connotation of government intervention in the exchange rate.Without the government's intervention, the dollar would not have such a strong internal explosive power and staying power.At that time, the colorful Internet stock bubbles disturbed people's vision and perception, so that they did not realize that the dollar was rising step by step.The negative impact of dollar appreciation on the company's exports was also offset and downplayed by the rapid economic growth.On the other hand, one can also believe that the appreciation of the dollar has prompted the influx of foreign capital, thereby accelerating the bubble process in the financial market.

In addition to the United States, whether the European Union and Japanese governments adopt intervention policies is also related to the relative value of the euro and the yen.Since October 2000, 10, when the euro hit a record low of US$25, although the US dollar has depreciated relative to major international currencies, the magnitude of the depreciation is quite different.Although the rate of depreciation for the euro was as high as nearly 0.82%, the rate of depreciation for another major currency, the yen, was only 54%.

This is a typical case of exchange rate adjustment.It can be seen that the degree of government intervention in the exchange rate directly affects the value of the currency.

So why does the government intervene in the exchange rate?Simply put, if the exchange rate floats freely according to the forces of the market, it may fluctuate violently and bring great losses to people.For example, today 1 US dollar can be exchanged for 8 yuan, but tomorrow it can be exchanged for 10 yuan, and the day after tomorrow it can only be exchanged for 5 yuan.Domestic exporters wait until the next day to trade in order to exchange the received dollars for more renminbi.Domestic importers, in order to buy more goods in exchange for more dollars in renminbi, will wait until the day after tomorrow to make transactions.Therefore, if the exchange rate fluctuates too violently, it will bring a lot of trouble to the import and export trade!Therefore, when there are signs of large fluctuations in the exchange rate, under normal circumstances, when the exchange rate of the local currency rises sharply, the government will sell the local currency and buy foreign currency, and the foreign currency purchased becomes the country's foreign exchange reserves; when the exchange rate of the local currency plummets, The government will buy domestic currency and sell foreign currency. At this time, foreign exchange reserves become a reservoir for adjusting exchange rate fluctuations.

This is a more passive situation.In order to balance the balance of payments, the government sometimes actively guides long-term changes in the exchange rate.If a country has a huge trade deficit, in addition to using foreign exchange reserves to make up for the deficit, the government will sometimes depreciate its currency, which will increase the cost of imports and thus inhibit the import industry.If a country has a huge and sustained trade surplus, it means that the goods sold are too cheap and the resources are not being used rationally. At this time, the government should appropriately appreciate the currency to make the balance of payments roughly balanced.

If the government does not let the currency appreciate, because the exchange rate also involves the interests of the countries with which it trades, it will sometimes invite the intervention of other countries. The essence of exchange rate disputes is actually a dispute over national interests.Behind the exchange rate fluctuations is not only the competition among the currencies of various countries, but also the competition of national strengths.Therefore, the government of a country always has to weigh the gains and losses of the exchange rate and make corresponding arrangements flexibly so as to maximize its own interests.

(End of this chapter)