Fed Chair Powell: Lowering inflation requires ‘unpopular measures’

New York

Federal Reserve Chairman Jerome Powell made his first public appearance of the year on Tuesday, stressing the importance of central bank independence and its commitment to lowering inflation.

The painful rate hikes the Fed is implementing to combat high prices don’t make the 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 the public with immeasurable benefits over time. But 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 lack 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 “should ‘stick to our knitting’ and not stray to seek perceived social benefits that aren’t closely related. to our statutory purposes and powers”.

The Fed will not be “a climate decision-maker,” he said.

The US central bank recently implemented a voluntary pilot program that asks the six largest banks to test their stability under various weather event scenarios. The introduction of the program, which comes with no sanctions, has led some politicians to accuse the central bank of promoting a political agenda.

“Today, some analysts are questioning whether integrating perceived risks associated with climate change into banking supervision is appropriate, wise and consistent with our existing mandates,” Powell said Tuesday. “In my view, the Fed has narrow, but important, responsibilities regarding climate-related financial risks. These responsibilities are closely tied to our banking oversight responsibilities. The public reasonably expects supervisors to require that banks understand and appropriately manage their material risks, including financial risks related to climate change.

Powell did not explicitly mention his political outlook in his speech.

Inflation rates in the United States (as measured by the Department of Labor’s Consumer Price Index) have steadily declined over the past five months. This allowed the Fed to begin to scale back its historically high rate hikes intended to cool the economy and fight rising prices.

Inflation in the Eurozone, meanwhile, remains at a staggering 9.2% – although it declined between November and December. ECB President Christine Lagarde said last month that she expects interest rate hikes to pick up “significantly, as inflation remains far too high and is likely to stay in the above our target”.

“If you compare with the Fed, we have more ground to cover. We have more time to do,” she added.

The Bank of England, meanwhile, has also warned that inflation, still at its highest level since the 1980s, is not going anywhere. BoE chief economist Huw Pill said this week that inflation could persist longer than expected despite recent declines in wholesale energy prices and an economy on the verge of recession.

These three central banks are fighting under different conditions, but they share a similar battle strategy: to keep tightening.

Central bankers have championed the importance of the independence and credibility of their institutions, which have come under fire as policymakers are accused of leaving soaring inflation unchecked for too long.

Minutes from the Fed’s December meeting, released last week, said the steering committee would “continue to make decisions meeting by meeting,” leaving options open for the size of rate hikes next. monetary policy decision on 1 February.

No politician predicted that it would be appropriate to cut the bank’s benchmark lending rate this year. And while officials hailed the recent slowdown in inflation, they stressed that “a lot more evidence” was needed for a Fed “pivot.”

Last week’s jobs report further muddied the picture, showing that employment remained strong while wage growth slowed.

Thursday’s CPI for December – which will be the first inflation check of the new year – will also provide useful clues for investors as to whether price increases in the United States are cooling sufficiently.

Encouraging data could bolster consensus estimates calling for a quarter-percentage-point interest rate hike in February, down from December’s half-point rise and four previous three-point hikes. quarter points.

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