Fed's Powell Speaks Out on Central Bank's Mission, Role in Climate Change

Central bank must safeguard independence, avoid broadening mission, says Fed chair

U.S. Federal Reserve Board Chairman Jerome Powell waits to testify at a Senate Banking and Housing and Urban Affairs Committee hearing on "The Semiannual Monetary Policy Report to Congress" on Capitol Hill in Washington, U.S., February 26, 2019.
U.S. Federal Reserve Board Chairman Jerome Powell.

REUTERS/Jim Young

 

Key Takeaways

  • Independence remains critical to the Federal Reserve's mission, Powell says
  • Price stability and employment need to remain the central bank's stated focus
  • Fed should avoid veering into attempts at achieving broader societal benefits

The Federal Reserve must remain an independent body and should focus on its dual mandate of promoting maximum employment and price stability, avoiding trying to set policy to achieve societal goals, Fed Chair Jerome Powell said today.

In prepared remarks at the Symposium on Central Bank Independence in Stockholm that didn't include any reference to the Fed's approach to fighting inflation, Powell emphasized the need for the Fed to remain insulated from political influence.

Powell's comments, as the Fed battles to control inflation, come as the central bank draws pressure from across the political spectrum to either expand its historical role or to stick to it more closely.

"Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy," Powell said. "The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors."

Powell said the Fed remains "tightly focused" on achieving the dual mandate Congress has established for it. That means it doesn't intend to expand its role to address other societal challenges such as climate change.

"We should 'stick to our knitting' and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities," Powell said, adding that the Fed's only narrow role in climate change concerns its oversight of banks and the expectation that they "appropriately manage" their material risks, including financial risks tied to climate change.

"Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public's will as expressed through elections," he said. "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 policymaker.'"

Political Pressure

Last month, Senate Republicans proposed legislation they said would provide more congressional oversight of a Fed they view as having strayed too far from the mission Congress outlined when establishing the central bank in 1913.

Others, however, want the Fed to do exactly that. The Natural Resources Defense Council, for example, issued a report last summer saying the Fed must consider the economic impact of climate change in its monetary policy decisions, a stance shared by many progressives in Congress.

"As the nation's economic guardian, the Federal Reserve has an obligation to assess risks to the economy, to protect consumers and to promote financial stability, but it's not doing enough today to factor in the growing risks from climate change," it said.

Powell's comments today resisted the notion that much of anything should change with the Fed's role in overseeing banks, monetary policy, or the broader U.S. economy.

"It is essential that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our scope to other important social issues of the day," he said. "Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence."

Article Sources
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  1. Board of Governors of the Federal Reserve System. "Panel on 'Central Bank Independence and the Mandate—Evolving Views.'"

  2. Reuters. "Republican senators propose overhaul of Federal Reserve amid concerns about politics."

  3. Natural Resource Defense Council. "NRDC Report: Federal Reserve System Must Add Climate Risk to Safeguard Families & Economy."

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