Jay Powell says the Fed will not become a "climate policy maker"

Jay Powell says the Fed will not become a “climate policy maker”

The Fed will not become a “climate policy maker,” Jay Powell said, launching a vehement defense of the US central bank’s independence from political influence.

In a speech on Tuesday, the Fed chairman said the central bank should steer clear of issues outside its congressional mandate and instead maintain a narrow focus on maintaining stable consumer prices, promoting a healthy job market, and ensuring safety. banking system in the country. .

“It is imperative that we stick to our legal goals and powers, and resist the temptation to broaden our reach to address other important social issues of the day,” he said at a conference hosted by the Swedish central bank.

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

“We are not and will not be a climate policy maker,” he added.

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

He added, “The public would reasonably expect supervisors to require banks to understand and appropriately manage their material risks, including financial risks from climate change.”

In a panel that followed the remarks, Mervyn King, former governor of the Bank of England, said the central bank’s independence was “a huge responsibility and one that could not be abused by trying to infiltrate areas not expressly authorized by the relevant political process”.

On climate-related issues, he said, “I am concerned that people, in their great zeal to do good, are actually endangering the independence of the central bank.”

Republican senators last year blocked the appointment of Sarah Bloom Raskin, chosen by Joe Biden to lead banking oversight at the Federal Reserve, after he fell out with her calls for regulators to preemptively address financial risks related to climate change.

Several other major central banks have called for expanding their mandate to include monitoring climate risks. Mark Carney, another former Governor of the Bank of England, was the main supporter of such a shift.

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

“Restoring price stability when inflation is high could require unpopular measures in the short term because 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 interest 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 roll back its tightening plans, warning of unnecessary economic suffering and excessive job losses.

“The tools we have are working and I think there is nothing wrong with our mandates,” Powell told the committee.

Speaking at the same event in Stockholm, ECB Executive Council member Isabel Schnabel said monetary policymakers should press ahead with raising interest rates to fight inflation despite the risk that higher borrowing costs could derail the green transition.

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

Schnabel’s view matches the consensus among central bankers that it is up to governments to drive the transition to cleaner energy, while monetary policymakers focus on their primary task of fighting inflation. It noted the “continued buildup of underlying price pressures” despite an unexpectedly sharp drop in headline inflation in the eurozone as energy prices fell.

But Schnabel said the ECB needed to act faster to bring its investment and lending operations in line with the goals of the Paris Agreement and achieve carbon neutrality by 2050.

The ECB had aimed to make its corporate bond holdings more climate-friendly by weighing up climate-related benchmarks when it made new purchases — but since it has stopped increasing its net bond holdings, “this policy has lost a lot of its power,” he added. Schnabel.

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