Fed, Powell warns: “Yes to rate hikes, politics don’t intervene”

Straight bar and no interference from politicians. The path of the Federal Reserve outlined by Chairman Jerome Powell from Stockholm has been stark. Guest of Sveriges Riksbank for the annual symposium on the independence of central banks, Powell recalled that the current path must be maintained to counter flare-ups of inflation. And, above all, that we must not stray from it “to pursue perceived social benefits that are not strictly linked to our objectives”. In other words, one thing the Fed must not lose sight of the goals of price stability and full employment that are part of their dual mandate.

No backtracking
After the enormous monetary policy efforts that began in the spring of 2022 and continued throughout last year, the Federal Reserve will not reverse its steps quickly. That is, interest rate hikes will continue. As explained to Sveriges Riksbank by the member of the board of the European Central Bank Isabel Schnabel, the squeeze will continue. And it is significant that the two exponents of the two central banks on either side of the Atlantic Ocean recalled the independence of their respective institutions in a symposium on the subject, after days of attacks by the political class of many countries, convinced that the director of Fed and ECB has been too dangerous for global economic activity.

Independence
This is not the case according to Schnabel, nor is it for Powell. The US central banker explained that “the independence of monetary policy lies in the advantages of insulating monetary policy decisions from short-term political considerations”. Specifically, he explained, “price stability is the foundation of a healthy economy and provides the public with immeasurable benefits over time.” However, 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 absence of direct political control over our decisions, he said, “allows us to take these necessary steps without considering short-term political factors.” And it is for this reason, Powell underlined, that it is necessary that “the advantages of an independent monetary policy in the US context are well understood and widely accepted”.

“Let’s stick to the goals”
While the Fed is pulled by the jacket by many observers and policymakers, it must continue what it has always done. That is to protect the economy as a whole, Powell remarked. “It is essential that we stick to our statutory objectives and our authorities and that we resist the temptation to broaden our outreach to address other important social issues of the day. Tackling new targets, however worthy, without a clear statutory mandate would undermine the case for our independence.” A message sent to Congress, but also to industrial lobbies, which ask for less aggressiveness from the Washington institution. And Powell immediately refers to trade associations, such as credit. “In the area of ​​banking regulation, the Fed also enjoys a certain degree of independence, as do other federal bank regulators,” he explained. Independence in this area, he continues, “helps ensure that the public can be confident that our supervisory decisions are not influenced by political considerations.”

Common line with the ECB

Not even one of the most controversial points was missing, that of climate risk and the weight in bank balance sheets. Fully embraced by Christine Lagarde and the ECB, it is incorrect for Powell’s Fed that it is a central bank problem. “Some analysts today question whether incorporating perceived risks associated with climate change into banking supervision is appropriate, wise and consistent with existing mandates,” he said. And then the jab. “Addressing climate change appears likely to require policies that would have significant distributional and other effects on companies, industries, regions and nations. Decisions on policies to directly address climate change should be made by elected branches of government and thus reflect the will of the public expressed through elections.

The green jab
At the same time, Powell explained, “the Fed has limited but important responsibilities regarding climate-related financial risks. These responsibilities are closely related to our responsibilities for banking supervision.” This is because, like any central bank, contact with citizens’ opinion cannot be forgotten. “The public reasonably expects supervisors to require banks to understand and adequately manage their material risks, including the financial risks of climate change,” Powell said. Which, at the same time, gave another jab at US politics. “Without explicit legislation from Congress, 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.” Because the Fed’s work is different, and Powell said it explicitly: “We are not, and will not be, a ‘climate policy maker'”.