Fed will not become a ‘climate policymaker’, says Jay Powell

Jay Powell has said the Federal Reserve will not become a “climate policy maker” as he raised a full defense of the US central bank’s independence from political influence.

In a speech on Tuesday, the Fed chairman said the central bank should move away from matters outside its congressionally mandated purview and instead maintain a narrow focus on keeping consumer prices stable, boosting a healthy labor market and guaranteeing the security of the country’s banking system. .

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

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

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

Republican lawmakers have accused the Fed of overstepping its mandate by pledging to consider climate-related financial risks, an area in which Powell said Tuesday the central bank had “narrow but important responsibilities” to related to banking supervision.

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

On a panel following the comments, Mervyn King, a former governor of the Bank of England, said central bank independence was a “great responsibility and cannot be misused by trying to creep into areas which are not delegated to explicitly from the right side, the political process”.

“I worry that people, in their great enthusiasm to do 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 banking supervision at the Fed, after opposing her calls for regulators to more proactively address financial risks related to climate change.

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

Powell on Tuesday said central bank independence was especially important if the Fed was to succeed in its battle to tame inflation, which still lingers at multi-decade highs.

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

Since March, the Fed has raised its key rate from near zero to just under 4.5 percent and plans to further squeeze the economy this year.

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

“The tools that we have are working and I think there’s nothing wrong with our mandates,” Powell told the panel.

Speaking at the same event in Stockholm, European Central Bank executive board member Isabel Schnabel said monetary policymakers should continue to raise interest rates to fight inflation, despite the risk that higher borrowing costs could disrupt global environmental efforts.

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

Schnabel’s view is in line with the consensus among central bankers that it is up to governments to lead the transition to cleaner energy, while monetary policymakers should focus on their primary task of fighting inflation. It noted a “continuing rise in underlying price pressures” despite the unexpectedly sharp fall in headline eurozone inflation as energy prices eased.

But Schnabel said the ECB needed to act more quickly to bring its own investment and lending operations in line with the targets of the Paris agreement and to achieve carbon neutrality by 2050.

The ECB had aimed to make its holdings of corporate bonds more climate-friendly, placing more weight on climate-related criteria when making new purchases. However, because it has stopped growing its net bond holdings, that policy has “lost a lot of its impact,” Schnabel added.