Powell Vows to Limit Fed’s Climate Role to Protect Independence

Federal Reserve Chair Jerome Powell sought to draw a line around how far the central bank will use its powers to promote a greener economy, vowing it will not be a climate regulator.

(Bloomberg) — Federal Reserve Chair Jerome Powell sought to draw a line around how far the central bank will use its powers to promote a greener economy, vowing it will not be a climate regulator.

“The Fed does have narrow, but important, responsibilities regarding climate-related financial risks,” Powell said Tuesday in brief prepared remarks on central bank independence at a forum in Stockholm. “But 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.’” 

Powell didn’t directly comment on the economic or monetary policy outlook in his prepared text. He did say that “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.”

The Fed chair is three weeks away from the next meeting of the Federal Open Market Committee, which last year raised its benchmark lending rate from near zero to a range of 4.25% to 4.5% to battle high inflation. Officials are eyeing raising rates to above 5% this year, though they may again slow the pace of hikes at the next gathering.

Powell said the Fed’s independence has served the public well, and added that the central bank “must continuously earn” it by achieving its goals and providing transparency to the public and Congress. 

The comments comes as the Fed is facing multiple requests from Congress to be more transparent about the selection of its regional bank presidents which are picked in a process that critics call opaque and complain has little accountability about how the decisions are made.

Powell has faced competing pressures from both Democrats and Republicans over the extent to which the Fed focuses on climate change. In 2021, some Democratic lawmakers and left-leaning groups opposed his candidacy for a second term, saying Powell wasn’t doing enough to combat global warming.

At the same time, the central bank under Powell has increasingly turned its focus to financial risks presented by climate change, attracting criticism from Republican lawmakers.

Powell said the central bank 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.” He added that restoring price stability can require unpopular measures such as slowing the economy.

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

Answering questions later in the panel, the Fed chair said that the pandemic revealed weaknesses in the non-bank financial sector, such as money market funds and the US Treasury market. He said the solutions to these problems lie in “changes to the structure” of these markets to make them more resilient. 

“Expanding the provision of central bank liquidity is not the desired response,” he said.

Powell also said that the new arrangement of emergency lending imposed by the 2010 Dodd-Frank post-financial crisis overhaul of financial regulations, where the Fed now has to obtain prior approval from the Treasury Secretary before establishing a broad-based emergency lending facility, worked well during the pandemic.

“There had been a concern in the United States that Dodd Frank had too limited the Fed’s authority under Section 13.3 to do facilities and lending,” Powell said. 

“The new system actually worked quite well,” he said, adding: “These are extraordinary measures. We only have the authority during emergencies, and to have the elected government approving it — it was a very constructive process.”

–With assistance from Alexander Weber, Niclas Rolander and Love Liman.

(Adds Powell comments on emergency lending and financial stability in final paragraphs)

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