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Powell Says Fed Will Not Be a ‘Climate Policymaker’

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Jerome H. Powell, the Federal Reserve chair, said that to retain its independence from politics, the central bank must “keep on with its knitting” — and which means it shouldn’t be the fitting institution to delve into issues like mitigating climate change.

“Without explicit congressional laws, it will be inappropriate for us to make use of our monetary policy or supervisory tools to advertise a greener economy or to realize other climate-based goals,” said Mr. Powell, who delivered his comments at a conference held by Sweden’s central bank. “We will not be, and is not going to be, a ‘climate policymaker.’”

Mr. Powell’s comments responded to occasional calls from Democrats for the Fed to take a more energetic role in policing climate change, and to skepticism from some Republicans that it may well guard against climate-related risks to the economic system without overstepping and actively influencing whether industries like oil and gas can access credit.

While the central bank is working on ways to higher monitor climate-related risks at financial institutions, officials including Mr. Powell have been clear that they shouldn’t attempt to incentivize banks to lend to green projects or discourage them from lending to carbon-producing ones.

“Addressing climate change seems prone to require policies that might have significant distributional and other effects on corporations, industries, regions, and nations,” Mr. Powell said in his remarks.

Inflation F.A.Q.

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What’s inflation? Inflation is a loss of buying power over time, meaning your dollar is not going to go as far tomorrow because it did today. It is often expressed because the annual change in prices for on a regular basis goods and services equivalent to food, furniture, apparel, transportation and toys.

What causes inflation? It will possibly be the results of rising consumer demand. But inflation may also rise and fall based on developments which have little to do with economic conditions, equivalent to limited oil production and provide chain problems.

Is inflation bad? It is determined by the circumstances. Fast price increases spell trouble, but moderate price gains can result in higher wages and job growth.

Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets normally have historically fared badly during inflation booms, while tangible assets like houses have held their value higher.

The Fed’s increasing openness and greater willingness to discuss issues like climate, racism and inequality in recent times has occasionally drawn backlash from Republicans, including several on the Senate Banking Committee, which helps to oversee the central bank.

The Fed should “not wander off to pursue perceived social advantages that will not be tightly linked to our statutory goals and authorities,” Mr. Powell said in his speech, seemingly responding to such concerns.

The talk over the Fed’s role in climate change conversations — and in politicized issues more broadly — has faded into the background because the more immediate problem of rapid inflation has taken center stage. But it surely stays a gradual drumbeat that’s prone to return to the fore, particularly now that Republicans control the House.

The Fed desires to avoid overstepping and drawing backlash that might imperil its freedom to set policy without interference from Congress and the White House.

America’s central bank is given substantial freedom to set policy without political interference. Its officials in Washington are chosen by the president and confirmed by the Senate, but once in office, they’re free to set policy as they see fit and in collaboration with their colleagues from regional Fed banks across the country. Congress gives the Fed its broad goals — maximum employment and stable prices — but its policymakers are allowed to interpret what that mandate means and pursue it as they see fit.

That implies that central bankers could make difficult and potentially painful decisions after they imagine it’s essential, even when those selections might prove politically unpalatable. That is especially true today, because the Fed raises rates to restrain the economy and control rapid inflation. Its actions are prone to cause unemployment to rise and wage growth to slow, but officials think those sacrifices are needed to be certain that fast inflation doesn’t turn out to be a more everlasting feature of the American economy.

“Restoring price stability when inflation is high can require measures that will not be popular within the short term as we raise rates of interest to slow the economy,” Mr. Powell said. “The absence of direct political control over our decisions allows us to take these essential measures without considering short-term political aspects.”

But Mr. Powell said that in a well-functioning democracy, most decisions ought to be made by elected officials, and grants of independence ought to be “exceedingly rare, explicit, tightly circumscribed and limited to those issues that clearly warrant protection.”

Climate is a very thorny problem for the Fed. As a bank supervisor, it must take into consideration risks to the economic system, and the road between protecting banks and influencing who can easily access financing could prove to be a fuzzy one.

Because of this, the Fed is proceeding rigorously because it develops bank-watching practices related to climate.

“The Fed does have narrow, but vital, responsibilities regarding climate-related financial risks,” Mr. Powell said. “The general public reasonably expects supervisors to require that banks understand, and appropriately manage, their material risks, including the financial risks of climate change.”

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