Federal Reserve Chair Jerome Powell said that the central bank will refrain from advancing social policy, especially with respect to climate change.
Powell remarked in a Tuesday speech delivered in Sweden that elected lawmakers and monetary policymakers should pursue their distinct mandates. He called on fellow central bankers to “stick to our knitting” and not “wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities.”
“Some analysts ask whether incorporating into bank supervision the perceived risks associated with climate change is appropriate, wise, and consistent with our existing mandates,” Powell said. “Addressing climate change seems likely to require policies that would have significant distributional and other effects on companies, industries, regions, and nations. 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.”
The Federal Reserve has recently introduced programs meant to evaluate perceived “climate-related financial risks.” Policymakers unveiled an initiative with six of the nation’s largest banks to examine various risk scenarios posed by climate change, although no “capital consequences” would emerge from the exercise. Officials also announced plans to work with the Treasury Department to consider the private sector’s approach to climate risk.
Other nations’ central banks, including the Bank of England, have formerly conducted similar initiatives meant to help executives navigate a transition to an economy with net zero emissions. The Federal Reserve routinely runs stress tests to determine whether the financial sector is able to weather various economic crises.
Powell nevertheless added that the Federal Reserve, in his view, has a “narrow” but “important” responsibility with respect to climate risks, largely by way of bank supervision. He clarified that using monetary policy or supervisory tools to “promote a greener economy” would be “inappropriate for us,” adding that the Federal Reserve will never be a “climate policymaker.”
Federal Reserve officials have recently grappled with record inflation that has presented obstacles to economic growth following the lockdown-induced recession. Policymakers raised rates by three-quarters of a percentage point on four consecutive occasions last year before implementing a half-percent increase last month, causing higher rates across the economy.
The speech from Powell comes after multiple Democratic lawmakers proposed enacting legislation that would incorporate racial equity goals into the Federal Reserve mandate, which currently centers upon maximum employment and price stability. The Federal Reserve Racial and Economic Equity Act, which passed the House of Representatives last year, would require central bankers to minimize and eliminate “racial disparities in employment, wages, wealth, and access to affordable credit,” as well as submit labor force trends to lawmakers with “a comparison among different demographic groups, including race, gender, and educational attainment,” according to a press release from the office of Sen. Elizabeth Warren (D-MA).
“Long before the pandemic hit people of color the hardest, my colleagues and I had called on the Federal Reserve to fix systemic barriers,” Rep. Maxine Waters (D-CA) remarked. “The current crisis has only further highlighted the fact that we need all hands on deck, including the Federal Reserve, to take action to address racial equity.”