Powell stresses the need for policy independence from the Fed while fighting inflation

Powell stresses the need for policy independence from the Fed while fighting inflation

Powell stresses the need for policy independence from the Fed while fighting inflation

US Federal Reserve Chairman Jerome Powell attends a press conference in Washington, DC on December 14, 2022.

Liu Jie | Xinhua News Agency | Getty Images

Federal Reserve Chairman Jerome Powell on Tuesday stressed the need for the central bank to be free from political influence as it tackles persistently high inflation.

In a speech to Sweden’s Riksbank, Powell noted that stabilizing prices requires making tough decisions that can be politically unpopular.

“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 president said in prepared remarks.

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

Powell’s remarks came during a forum to discuss central bank independence and were to be followed by a question-and-answer session.

The speech contained no direct clues about the policy future of a Fed that raised interest rates seven times in 2022, for a total of 4.25 percentage points, and indicated that other increases are likely underway this year.

While criticism of Fed actions by elected leaders is often done in calmer tones, Fed Powell faced vocal opposition from both sides of the political aisle.

Former President Donald Trump has ripped the central bank as it raised rates during his administration, while progressive leaders such as Sen. Elizabeth Warren (D-Mass.) have criticized the current round of hikes. Chairman Joe Biden has largely resisted comments on the Fed’s actions while noting that the central bank’s primary responsibility is to fight inflation.

Powell has repeatedly stressed that political factors did not weigh on his actions.

In another part of Tuesday’s speech, he responded to calls from some lawmakers for the Fed to use its regulatory powers to fight climate change. Powell noted that the Fed should “stick to our knitting and not stray to seek perceived social benefits that are not closely tied to our statutory goals and authorities.”

While the Fed has asked major banks to review their financial preparedness for major weather-related events such as hurricanes and floods, Powell said that’s all there is to it.

“Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the will of the public as expressed through elections,” he said. “But 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. We are not and will not be a ‘climate maker’.”

The Fed will, however, launch a pilot program this year that calls on the country’s six largest banks to participate in a “scenario analysis” aimed at testing the stability of institutions in the event of major weather events.

The exercise will take place outside of the so-called stress tests the Fed uses to test how banks would fare in hypothetical economic downturns. Participating institutions are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

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