LONDON (Reuters) - The era of extraordinary monetary policy and central bank dominance of macroeconomic policy may be at a critical juncture - and not just at this week's Fed meeting in Washington.
The U.S. Federal Reserve decides on Thursday whether to end its seven-year experiment with zero interest rates, having halted its money-printing 'quantitative easing' program last year.
It's a big moment for an approach to financial crisis management previously untried in modern western economies - one that overwhelmed financial markets but with no shortage of critics on all sides of the political spectrum.
For the central bank to say its economy is now strong enough to take higher borrowing rates marks a significant, if long-awaited, success for this unorthodox and controversial approach.
The U.S. recovery is real, if unspectacular. The economy is back near full employment. And fears that money printing would lead to rampant inflation have proved so wide of the mark that one of the few reasons the Fed might actually hesitate is due to lingering fear of headline deflation.
"We see a compelling case for commencing Fed action this week," said Deutsche Bank's research chief David Folkerts-Landau, citing the tight labor markets and likely rebound of temporarily depressed inflation as key reasons.
But a U.S. rate rise this week is far from assured, however, and far from the consensus view.
Powerful voices from both the World Bank to former Treasury Secretary Larry Summers say the Fed should hold off with headline inflation still near zero, the dollar rising and amid ructions on international markets.
Forecasters are narrowly split on the timing of a rate hike, and markets now only see a 1-in-4 chance of a move this week. Some doubt a move before 2016.
Any potential hesitation may well split the jury again on the legacy of QE and again raise political questions about central banks' power and mandates.
One of those queries was whether government bond buying and zero rates had compromised central bank independence by giving them a quasi-fiscal as well as monetary policy role that effectively underwrote mounting sovereign debts.
The concern has been that central banks, ultimately accountable to elected governments if not directed by them, may find it politically difficult to reverse course if that exit threatened the stability of government finances.
Who directs the decision then is key for both conservatives wary of any monetization of government spending and left-leaning politicians who fret that lifting interest rates could force more austerity to offset higher government interest bills.
And the decision-making process is less than clear cut. Central banking watchdog the Bank for International Settlements has for years warned about the increasingly "blurred lines" between various mandates of monetary policy, financial stability and government debt management.
Developments in British politics this week make for an interesting backdrop and show not everyone would bemoan the end of central bank independence - a relatively short-lived experience of less than 20 years for many countries, including the United Kingdom.
Designed to prevent ruling parties abusing monetary policy to help win elections, some critics reckon central bank independence itself is the historical experiment and stress that it has not prevented booms and busts or market crises nor has it been unambiguously positive for everyone.
Many liberal and left-wing economists, including Nobel laureate Joseph Stiglitz, have blamed government bond buying and zero rates for exaggerating inequality by inflating asset prices held mostly by the wealthy.
On Monday, Jeremy Corbyn, the newly elected left-wing leader of Britain's main opposition Labour Party, appointed a finance spokesman who has in the past called for Bank of England independence to be reversed and interest rates to be set by government once again.
"In the first week of a Labour Government democratic control of the major economic decisions would be restored by ending the Bank of England’s control over interest rates and bringing the nationalized and subsidized banks under direct control," shadow Chancellor John McDonnell wrote in 2012.
What's more, Corbyn also proposes a "People's QE" where any future BoE bond buying be directed to newly issued bonds of a national development bank, the proceeds of which would fund infrastructure spending that creates jobs and public goods.
Tax expert and Corbyn adviser Richard Murphy, who came up with the idea, insists this would not necessarily be a big departure from current practice. Treasury, he claims, already has to authorize any QE operation and its makeup and the idea of independence is often overstated, he said.
"It is obvious that the strategy and policy decisions on QE lie with the Treasury," Murphy wrote this week, adding: "The Bank has a legal duty to support government fiscal policy."
Even if a Labour Party, currently trailing the ruling Conservatives in opinion polls, struggles to get elected, its stance does bring questions about the role and control of the central bank back into popular discourse once again.
In arguing for more BoE QE in 2012, then Bank of England policymaker and U.S. academic Adam Posen addressed that point directly: "The source of central bank independence is public support from elected officials that the central bank is pursuing desirable social goals."
Editing by Hugh Lawson