Fed Chairman Powell: Lowering inflation requires “unpopular measures”.



New York
CNN

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

During a panel discussion at an event hosted by Sweden’s central bank, Sveriges Riksbank, Powell said the Fed’s painful rate hikes to combat high prices have made officials particularly unpopular.

However, he noted that this is a necessary measure: “Price stability is the basis of a healthy economy and provides immeasurable benefits to the population over time. But restoring price stability when inflation is high may require unpopular measures in the short term as we raise interest rates to slow the economy.”

“The lack of direct political control over our decisions allows us to take these necessary actions without considering short-term political factors,” Powell added.

He also highlighted climate change as a prime example of why officials at the Fed should “stick to our cause” and not pursue social benefits that are not closely tied to our statutory goals and mandates.

He said the Fed “will not be a climate politician.”

The U.S. central bank recently established a voluntary pilot program that calls on the six largest banks to test their stability under various climate event scenarios. The program’s impunity has led some politicians to accuse the central bank of promoting a political agenda.

“Some analysts today question whether including the perceived risks of climate change in bank supervision is appropriate, wise and consistent with our existing mandates,” Powell said Tuesday. “I think the Fed has a narrow but important commitment to climate finance risks. These obligations are closely related to our banking supervision obligations. The public reasonably expects supervisors to require banks to understand and appropriately manage their material risks, including the financial risks of climate change.”

Powell did not make his policy perspective clear in his speech.

US inflation rates (as measured by the Labor Department’s Consumer Price Index) have been falling steadily over the past five months. This allowed the Fed to begin easing the scale of historically high interest rate hikes to cool the economy and combat rising prices.

Inflation in the Eurozone, meanwhile, eased between November and December, but remains at a remarkable 9.2%. ECB President Christine Lagarde said last month that she expected interest rate hikes “to increase significantly as inflation remains very high and is projected to remain above our target for a very long time.”

“Compared to the Fed, we have a lot more ground to cover. We have more time,” he added.

Meanwhile, the Bank of England has warned that inflation, still at its highest level since the 1980s, is not going anywhere. BoE chief economist Huw Pill said this week that despite recent falls in wholesale energy prices and an economy on the brink of recession, inflation may persist longer than expected.

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 come under fire as policymakers have been accused of allowing soaring inflation to go unchecked for too long.

Minutes of the Fed’s December meeting, released last week, noted that the policymaking committee “will continue to make decisions at the meeting,” leaving open options on the size of the rate hike at its next monetary policy decision on Feb. 1.

No politician predicted that it would be appropriate to reduce the bank lending rate this year. While officials welcomed the recent easing of inflation, they stressed that “significantly more evidence” was needed for the Fed’s “pivot.”

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

Thursday’s CPI for December — which will be the first inflation check of the new year — will give investors useful clues that U.S. price increases have cooled enough.

The encouraging data could bolster consensus estimates calling for a quarter-point rate hike in February, down from a half-point hike in December and four previous three-quarter hikes.



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