The Fed won’t become a “climate policy maker,” says Jay Powell

Jay Powell said the Federal Reserve will not become a “climate policy maker,” as he fully defended the US central bank’s independence from political influence.

In a speech on Tuesday, the Fed chairman said the central bank must steer clear of issues outside of Congress’ jurisdiction and instead maintain a narrow focus on keeping consumer prices stable, fostering a healthy labor market and ensuring the safety of the nation’s banking system.

“It is essential that we stick to our statutory goals and powers, and resist the temptation to expand our scope to address other important social issues of the day,” he told a conference organized by Sweden’s central bank.

“Without explicit legislation from Congress, it would be inappropriate for us to use our monetary policy or supervisory instruments to promote a greener economy or to achieve other climate-based goals.”

He added: “We are not and will not be a ‘climate policy maker’.”

Republican lawmakers accused the Fed of overstepping its mandate by pledging to consider climate-related financial risks, an area where Powell said on Tuesday the central bank has “narrow but important responsibilities” related to bank oversight.

“The public reasonably expects supervisors to require banks to understand and appropriately manage their material risks, including the financial risks of climate change,” he added.

In a panel that followed these comments, Mervyn King, former Governor of the Bank of England, said that the independence of the central bank “is a great responsibility and cannot be abused by trying to get into areas that are not explicitly delegated by the appropriate political process”.

“I worry that people, in their great enthusiasm for doing good, are actually putting central bank independence at risk,” he said of climate-related issues.

Republican senators last year blocked the nomination of Sarah Bloom Raskin, Joe Biden’s pick to lead the Fed’s bank watchdog, after challenging her calls for regulators to more proactively address financial risks linked to climate change.

Several other major central banks have advocated expanding their mandate to include policing climate risks. Mark Carney, another former BoE governor, has been a leading proponent of such a change.

Powell said on Tuesday that central bank independence is especially important if the Fed is to succeed in its battle to tame inflation, which remains at a multi-decade high.

“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,” he said. “The absence of direct political control over our decisions allows us to take these necessary actions without considering short-term political factors.”

Since March, the Fed has raised its benchmark rate from near zero to just under 4.5 percent and plans to squeeze the economy further this year. In separate remarks on Tuesday, Fed Governor Michelle Bowman said the central bank still had “a lot of work to do” in terms of tightening. She added that the size of the upcoming rate hike is increasing and that the eventual stopping point will depend on the data.

“I will be looking for strong signs that inflation has peaked and more consistent signs that inflation is on a downward path,” she said at an event hosted by the Florida Bankers Association.

Democratic lawmakers have already called on the central bank to abandon its tightening plans, warning of unnecessary economic pain and excessive job losses.

“The tools we have are working and I don’t think there’s anything wrong with our mandates,” Powell told the panel.

Speaking at the same event in Stockholm, European Central Bank executive board member Isabelle Schnabel said monetary policy makers should continue raising interest rates to fight inflation despite the risk that higher borrowing costs could derail global efforts to protect the environment. environment.

“The green transition would not succeed in an environment of high inflation.” “Price stability is a prerequisite for the sustainable transformation of our economy,” Schnabel said at an event in Stockholm on Tuesday.

Schnabel’s position is in line with the consensus among central bankers that it is up to governments to drive the transition to cleaner energy, while monetary policymakers should focus on their core task of fighting inflation. She pointed to a “persistent build-up of underlying price pressures” despite an unexpectedly sharp fall in headline inflation in the eurozone as energy prices fell.

However, Schnabel said the ECB needed to act more quickly to bring its own investment and lending operations in line with the goals of the Paris Agreement and achieve carbon neutrality by 2050.

The ECB aimed to make its holdings of corporate bonds more climate-friendly by placing more weight on climate-related criteria when making new purchases. However, since it has stopped increasing its net bonds, the policy has “lost a lot of its power,” Schnabel added.

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