Federal Reserve Chairman Jerome Powell made his first public appearance this year on Tuesday, stressing the importance of central bank independence and his commitment to reducing inflation.
The painful rate hikes the Fed is implementing to tackle high prices are not making officials particularly popular, Powell said during a panel discussion at an event hosted by Sweden’s central bank, Sveriges Riksbank.
But they are a necessary measure, he noted: “Price stability is the foundation of a healthy economy and provides immeasurable benefits to the public over time.” But restoring price stability when inflation is high may require measures that are unpopular 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 actions without considering short-term political factors,” Powell added.
He also pointed to climate change as a prime example of why Fed officials “need to ‘stick to our knitting’ and not wander off in pursuit of perceived social benefits that are not closely related to our statutory goals and mandates.”
The Fed will not be a “climate policymaker,” he said.
The U.S. central bank recently launched a voluntary pilot program that invites the six largest banks to test their stability under various climate event scenarios. The introduction of the program, which has no associated penalties, has led some politicians to accuse the central bank of promoting a political agenda.
“Today, some analysts are questioning whether including in bank supervision the perceived risks associated with climate change is appropriate, wise and consistent with our existing mandates,” Powell said on Tuesday. “In my view, the Fed has narrow but important responsibilities related to climate-related financial risks.” These responsibilities are closely related to our responsibilities for bank supervision. The public reasonably expects supervisors to require banks to understand and appropriately manage their material risks, including the financial risks of climate change.”
Powell did not explicitly mention his political views in his speech.
Inflation rates in the US (as measured by the Labor Department’s Consumer Price Index) have been steadily declining for the past five months. That allowed the Fed to begin to moderate the size of its historically high rate hikes aimed at cooling the economy and combating rising prices.
Meanwhile, eurozone inflation remains at a staggering 9.2% — although it eased between November and December. ECB President Christine Lagarde said last month that she expected interest rate hikes “to rise significantly further, as inflation remains too high and is forecast to remain above our target for too long.”
“If you compare with the Fed, we have more ground to cover.” We still have more left,” she added.
The Bank of England, meanwhile, also warned that inflation, which remains at its highest level since the 1980s, is not going anywhere. BoE chief economist Hugh Peel said this week that inflation could persist longer than expected despite the recent fall in wholesale energy prices and the economy on the brink of recession.
These three central banks are fighting in different conditions, but they share a similar battle strategy: Keep tightening.
Central bankers have defended the importance of independence and credibility for their institutions, which has come under fire as policymakers have been accused of letting soaring inflation go unchecked for too long.
Minutes from the Fed’s December meeting, released last week, note that the policy committee will “continue to make decisions on a meeting-by-meeting basis,” leaving options open for the size of a rate hike at the next monetary policy decision on Feb. 1.
No policymaker predicted that it would be appropriate to cut the bank’s benchmark borrowing rate this year. And while officials welcomed the recent easing of inflation, they stressed that “significantly more evidence” was needed for the Fed’s “turnaround.”
Last week’s jobs report further clouded the picture, showing that employment remained strong while wage growth moderated.
Thursday’s CPI for December — which will be the first inflation check of the new year — will also provide useful clues to investors on whether U.S. price increases are cooling sufficiently.
The encouraging data could boost consensus estimates calling for a quarter-percentage-point rate hike in February, a move lower than December’s half-point increase and four previous three-quarter-point hikes.