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January 11, 2023 10:41 am

Powell: Federal reserve may have to make unpopular decisions

He stressed the need for the Central Bank to be free from political influence
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Federal Reserves

Federal Reserve Chairman Jerome Powell stressed Tuesday the need for the central bank to break free of political influence while dealing with persistently high inflation.

In a speech to Sweden’s Riksbank Bank, he said price stability required difficult decisions that might be politically unpopular.

“Price stability is the cornerstone of a healthy economy and provides the public with countless benefits over time. But restoring price stability when inflation is high could require uncommon short-term measures as we raise interest rates to slow the economy.”

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

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

Read: Federal Reserve: Interest rate hikes for some time in the future

The letter did not include any direct evidence about the direction of policy for the Fed, which raised interest rates seven times in 2022, totaling 4.25 percentage points, and indicated that more increases are likely on the way this year.

In another part of Tuesday’s speech, he addressed calls from some lawmakers for the Federal Reserve to use its regulatory powers to address climate change.

Powell noted that the Fed should “commit to knitting us and not wander in pursuit of perceived social benefits that are not closely tied to our legal goals and authorities.”

While the Federal Reserve has asked major banks to examine their fiscal readiness in the event of major climate-related events such as hurricanes and floods, Powell said that is the most it should go.

“Policy decisions to directly address climate change must be made by the elected branches of government, thus reflecting the will of the public as expressed in elections,” he said. But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to foster a greener economy or to achieve other climate-based goals. We are not and will not be “climate policymakers”.

This year, the Federal Reserve will launch a pilot program inviting the country’s six largest banks to participate in a “scenario analysis” aimed at testing the stability of institutions in the event of major weather events.

For more on the Federal Reserve, click here.