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

Jay Powell has said the Federal Reserve will not become a “climate maker”, as he wholeheartedly defends the independence of the US central bank from political influence.

In a speech on Tuesday, the Fed chairman said the central bank should avoid issues that are beyond the purview of Congress and focus instead on maintaining consumer price stability, promoting a healthy labor market and the security of the country’s banking system. .

“It is essential that we stick to our statutory purposes and powers, and resist the temptation to broaden our scope to deal with other important social issues of the day,” he said. declared at a conference organized by the central bank of Sweden.

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

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

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 has “narrow but important responsibilities” related to it. to banking supervision.

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

In a panel following the remarks, Mervyn King, former Governor of the Bank of England, said central bank independence was a “great responsibility and it cannot be misused by trying to creep into areas that have not been explicitly delegated by the appropriate government”. political process”.

“I fear that people, in their great enthusiasm to do good, are actually jeopardizing central bank independence,” he said of climate-related issues.

Last year, Republican senators blocked the nomination of Sarah Bloom Raskin, chosen by Joe Biden to lead banking oversight at the Fed, after challenging her calls for regulators to more proactively address related financial risks. to climate change.

Several other major central banks have argued for expanding their remit to include monitoring climate risks. Mark Carney, another former BoE governor, was the main proponent of such a change.

Powell said on Tuesday that central bank independence was especially important if the Fed was to succeed in its battle to rein in inflation, which is still at its highest in decades.

“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 steps without considering short-term political factors.”

Since March, the Fed has raised its key rate from near zero to just under 4.5% and expects to tighten 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 magnitude of future rate increases and the eventual stopping point will depend on the data.

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

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

“The tools 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 board member Isabel Schnabel said monetary policy makers should continue raising interest rates to fight inflation despite the risk that higher borrowing costs will derail global environmental efforts.

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

Schnabel’s view aligns with the consensus among central bankers that governments should lead the transition to cleaner energy, while monetary policymakers should focus on their primary task of fighting inflation. . She pointed to a “persistent build-up of underlying price pressures” despite the unexpectedly sharp decline in headline eurozone inflation as energy prices fell.

But Schnabel said the ECB needed to move faster to align its own investment and lending operations with the goals of the Paris Agreement and achieve carbon neutrality by 2050.

The ECB aimed to make its corporate bond portfolios more climate-friendly by giving more weight to climate-related criteria when making new purchases. However, because she stopped increasing her net bond holdings, that policy “lost a lot of its punch,” Schnabel added.

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