Fed Chair Powell on central bank independence: getting inflation under control 'can require measures that are not popular'

(Kitco News) Federal Reserve Chair Jerome Powell addressed the need for central bank independence Tuesday, noting that getting inflation under control can mean unpopular measures in the short term.

"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," Powell said during a panel discussion hosted by the Swedish central bank Tuesday. "The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors."

Powell pointed out that the benefits of the Fed’s independence are well understood and accepted in the U.S. But he did add that independence “should be exceedingly rare, explicit, tightly circumscribed, and limited to those issues that clearly warrant protection from short-term political considerations.”

Given that, the Fed has made attempts to be more transparent. “We treat this [independence] as an active, not passive, responsibility, and over the past several decades, we have steadily broadened our efforts to provide meaningful transparency about … the decisions we make in service to the American public.”

The Fed also needs to resist ordaining its scope and it is not its place to address issues like climate change, noted Powell. “Taking on new goals … without a clear statutory mandate would undermine the case for our independence,” he said. “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 … Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy.”

There is, however, narrow responsibilities regarding climate-related financial risks for the Fed, which include bank supervision to require “banks understand, and appropriately manage, their material risks, including the financial risks of climate change.”

When answering a question about whether an event like the global financial crisis revealed a problem with the Fed's mandate, Powell said it was not his takeaway. "The tools were used innovatively to deal with difficult and unforeseen circumstances. We built a resilient core for the financial system. That financial system … held up better during the pandemic as a result."

On potential reforms, Powell said that the U.S. capital markets "are vibrant and very different from what banks do. It wouldn't be great to extend liquidity provisions," adding that work on structural reforms is performed.

Gold rallied to daily highs after Powell’s comments revealed no hawkish surprises. February Comex gold futures were last trading at $1,883, up 0.28% on the day. 

"Traders grow optimistic the Fed won't be able to follow through with [its] hawkish threats. Fed Chair Powell's appearance was really a non-event as he didn't focus on monetary policy. The next big move in gold seems like it will have to wait until this week's inflation report," said OANDA's senior market analyst Edward Moya.