February 9, 2023

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Fed Chairman Powell: Reducing inflation requires ‘uncommon measures’


New York
CNN

Federal Reserve Chairman Jerome Powell made his first public appearance this year on Tuesday, stressing the importance of central bank independence and its commitment to lower inflation.

Powell said during a panel discussion at an event hosted by Sweden’s central bank, Sveriges Riksbank, that the painful interest rate increases the Fed implements to tackle soaring rates don’t make officials particularly popular.

But he noted that they are a necessary measure: “Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require uncommon measures in the short term where we raise interest rates to slow the economy.”

Powell added that “the absence of direct political control over our decisions allows us to take these necessary actions without regard for short-term political factors.”

He also highlighted climate change as a prime example of why Federal Reserve officials “should” stick to our knitting needles “and not go around in pursuit of perceived social benefits that are not closely related to our goals and legal powers.”

He said the Fed would not be a “climate policy maker”.

The US central bank recently set up a voluntary pilot program that invites the six largest banks to test their stability under different scenarios of climate events. The introduction of the programme, for which there are no penalties associated, has prompted some politicians to accuse the central bank of promoting a political agenda.

“Today, some analysts are questioning whether including perceived risks associated with climate change in banking supervision is appropriate, prudent, and consistent with our existing mandates,” Powell said Tuesday. “In my view, the Federal Reserve has narrow, but important, responsibilities with respect to climate-related financial risks. These responsibilities are closely related to our responsibilities for bank supervision. The public reasonably expects that supervisors require banks to understand and appropriately manage their material risks, including That financial risk of climate change.”

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Powell did not explicitly state his political views in his speech.

US inflation rates (as measured by the Labor Department’s Consumer Price Index) Declining steadily over the past five months. This enabled the Federal Reserve to begin easing up on historically high interest rate hikes intended to cool the economy and fight rising prices.

Meanwhile, inflation in the Eurozone remains an impressive 9.2% – although it fell between November and December. Christine Lagarde, the president of the European Central Bank, said last month that she expected interest rates to rise “much more, because inflation remains very high and is expected to remain above our target for a very long time.”

“If compared to the Fed, we have more ground to cover. We have more time to go,” she added.

Meanwhile, the Bank of England also warned that inflation, which remains at its highest level since the 1980s, is not going anywhere. Bank of England chief economist Howe Bell said this week that inflation may persist for longer than expected despite the recent decline in wholesale energy prices and An economy on the brink of contraction.

These three central banks are fighting in different circumstances, but they share a similar battle strategy: keep tightening.

Central bankers have defended the importance of independence and credibility for their institutions, which have been criticized for accusing policymakers of abandoning High inflation unchecked for a long time.

The Fed’s December meeting minutes, released last week, indicated that the policy-making committee “will continue to make decisions by meeting,” leaving options open for the size of the rate hike in the next monetary policy decision on February 1.

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None of the policymakers anticipated that it would be appropriate to lower the bank’s benchmark borrowing rate this year. While officials welcomed the recent decline in inflation rates, they stressed that “more substantial evidence is needed” for the Fed to “pivot”.

Last week’s jobs report further muddied the picture, showing that employment remained strong while wage growth eased.

Thursday’s Consumer Price Index for December – which will be the first check of inflation for the new year – will provide investors with useful clues as to whether price hikes in the US are cooling down enough.

The encouraging data could bolster consensus estimates calling for a quarter-point rate hike in February, a turnaround from the half-point increase in December and the previous four hikes by three-quarters of a point.