Powell stresses need for Fed’s political independence while tackling inflation

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

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

“Price stability is the foundation of a healthy economy and provides immeasurable benefits to the public over time. But when inflation is high, restoring price stability may require actions that are unpopular in the short term as we raise interest rates to slow the economy,” the chair said in prepared remarks.

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

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

The speech gave no direct indication of where policy is headed for a Fed that has raised interest rates seven times for a total of 4.25 percentage points in 2022 and signaled that more hikes are likely this year.

While criticism of the Fed’s actions by elected leaders is often muted, the Powell Fed has faced vocal opposition from both sides of the political aisle.

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

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

Elsewhere in Tuesday’s speech, he drew calls from some lawmakers to use the Fed’s regulatory powers to address climate change. Powell noted that the Fed should “stick to our fabric and not stray away to pursue perceived social benefits that are not tightly linked to our statutory goals and authority.”

While the Fed has asked big banks to test their financial preparedness for major climate-related events like hurricanes and floods, Powell said that’s as far as it should go.

“Decisions about policies to directly address climate change should be made by elected branches of government and thus reflect the will of the people through elections,” he said. “But without clear congressional legislation, it would be inappropriate for us to use our fiscal policy or oversight tools to promote a green economy or achieve other climate-based goals. We are not, and will not be, ‘climate policy makers.’ “

However, the Fed will launch a pilot program this year that calls on the nation’s six largest banks to participate in a “planning analysis” aimed at testing institutions’ resilience in the face of major climate events.

The exercise will be performed in addition to so-called stress tests that the Fed uses to test how banks would fare in a hypothetical economic downturn. Participating institutions are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.