Fed chief defends independence against inflation and must avoid climate policy

The Federal Reserve’s independence from political influence is critical to its ability to fight inflation, but requires it to stay out of issues such as climate change that are beyond its mandate set by Congress, Fed Chair Jerome Powell said this week. Tuesday (10).

“Restoring price stability when inflation is high may require measures that are not popular in the short term, as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors,” Powell said at a forum on central bank independence sponsored by the Swedish central bank.

But “we must ‘stick to our plans’ and not deviate to pursue social benefits that are not strongly linked to our statutory goals and authorities,” Powell said. “Assuming new goals, however worthy they may be, without a clear statutory mandate would undermine the case for our independence.”

The Fed’s need to manage inflation through interest rates and other measures is “well understood and widely accepted,” Powell said, and embodied in a federal law that charges the central bank with maintaining full employment and stable prices.

While Powell said the Fed’s banking regulatory powers entrust it with ensuring that financial institutions understand the potential risks they face from climate change, “without explicit legislation from Congress, it would be inappropriate for us to use our monetary policy or oversight to promote a greener economy or to achieve other climate-based goals. We are not, and will not be, a ‘climate policy maker’”.

“Policy decisions to directly address climate change must be made by the elected branches of government and thus reflect the public will expressed through elections,” he said, reaffirming the principles he laid out earlier when questioned by the public or elected officials on the central bank’s approach to climate change.

Powell’s position on the matter contrasts with Europe’s main central banks, which have integrated efforts towards a green economy into their decisions.

But his vision also recognizes the political realities in the United States, where opinion among elected officials is more divided. Powell and the Fed have faced sharp criticism from Republicans, who now control one of the two houses of the US Congress, even for efforts to include climate-related considerations in their oversight of the financial system.