Much has been written lately on the decision by President Barack Obama to nominate Ben Bernanke for a second term as chairman of the US Federal Reserve. Some argued that had Mr Obama chosen otherwise, it would have signalled that the political independence of the Fed was under threat. However, we feel that the dangers for the Fed are not over yet.

Empirical research shows that central bank independence is of the utmost importance to having low and stable inflation. There is a clear correlation between lower inflation and more central bank independence. The explanation for this is that politicians tend to create too much liquidity when they have the opportunity to do so. In the medium to long term, too much liquidity ultimately results in excessively high inflation.