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The Fed needs freedom to make hard decisions

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The Fed needs freedom to make hard decisions for price stability

Image source: CNN

The Fed: After prices have risen to levels not seen in decades, the Federal Reserve attempted to control inflation last year.

However, their efforts have run into complications since political meddling has limited the Fed’s authority to make decisions.

Jerome Powell, the chairman of the Fed, recently spoke on the subject.

Remarks

Jerome Powell reiterated on Tuesday that for the central bank to effectively control excessive inflation, it must be free from political pressure.

Even if it leads to politically unfavorable criticism, the Fed Chairman informed Sweden’s Riksbank that stern measures would need to be taken to stabilize prices.

“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time,” said Powell.

“But 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 absence of direct political control over our decision allows us to take these necessary measures without considering short-term political factors.”

At a meeting to discuss the independence of central banks, the Fed Chair remarked.

There was a question-and-answer period following the comments.

Actions

Jerome Powell’s speech included no references to the course that the policy will take this year.

In 2022, the Federal Reserve raised interest rates a record seven times, for a total increase of 4.25 percentage points.

The increases raise the possibility of more hikes this year.

Read also: Apple and Tesla stocks drop in 4th quarter

Opposition

The Federal Reserve frequently makes choices that are harshly criticized.

Public officials’ grievances and critiques are nothing new, but Powell’s Fed has drawn fire from both political parties.

Prices increased under his leadership, which former president Donald Trump condemned.

Democrats like Elizabeth Warren, a progressive senator, have criticized the most recent interest rate hikes.

President Joe Biden has refrained from commenting on the Fed’s actions, stating that it is the central bank’s responsibility to deal with inflation directly.

Jerome Powell stated that political factors had not swayed him in spite of the allegations.

Calls for climate change

During his speech on Tuesday, Powell addressed the lawmakers’ calls to use the Fed’s regulatory authority to fight climate change.

Last year, he received letters from four top Republican House Financial Services Committee members.

The Republicans argued that the Federal Reserve shouldn’t control consumer demand or decide which businesses get more support.

Powell said that the Fed should continue on its current trajectory rather than deviate from pursuing perceived societal benefits that are weakly connected to their legal obligations and goals.

He asserts that the Fed’s request for large banks to evaluate their financial preparedness for climate-related calamities (such as hurricanes and floods) is the closest thing to climate-related activities they should be involved in.

“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,” added Powell.

“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 we will not be, a ‘climate policymaker.'”

Climate program

A “scenario analysis” is being solicited with the inclusion of the six biggest banks in the US as part of a pilot program the Fed is launching this year.

An institution’s resilience to significant climatic disasters will be assessed through the analysis.

The test will resemble the so-called stress tests used by the Fed to assess how banks might respond to actual economic downturns.

The following banks are taking part in the exercise:

  • Bank of America
  • Citigroup
  • Goldman Sachs
  • JPMorgan Chase
  • Morgan Stanley
  • Wells Fargo

Independence

Throughout his remarks, Jerome Powell discussed central bank independence and maintained that the American people profited from it.

According to Powell, central banks’ independence empowers them to make difficult decisions.

“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,” he added.

Congress set the highest employment and price stability targets for the Fed and its staff to be independent and use its tools to carry out the goals.

“Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence,” said Powell.

References:

The Fed is not a ‘climate-policy maker,’ Powell says

Powell says Fed might have to make unpopular decisions to stabilize prices

Based in LA, Alice Blake is a senior reporter for Kivo Daily. She primarily covers entrepreneurs.

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