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Fed Chair Powell: Lowering Inflation Requires 'Measures That Are Not Popular'

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New York

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

The painful rate hikes the Fed is implementing to combat high prices do not make policymakers particularly popular, Powell said during a panel discussion at an event hosted by Sweden’s central bank, Sveriges Riksbank.

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

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

He also highlighted climate change as a prime example of why Fed officials “should ‘stick to our knitting’ and not get sidetracked to pursue perceived social benefits that are not tightly tied to our statutory goals and authorities.”

The Fed will not “be a climate policy maker,” he said.

The US central bank recently instituted a voluntary pilot program that requires the six largest banks to test their stability under various weather event scenarios. The introduction of the program, which has no associated penalties, has led some politicians to accuse the central bank of promoting a political agenda.

“Today, some analysts are asking whether incorporating perceived risks associated with climate change into banking supervision is appropriate, sensible and consistent with our existing mandates,” Powell said Tuesday. “In my opinion, the Fed has narrow but important responsibilities regarding climate-related financial risks. These responsibilities are closely linked to our banking supervision responsibilities. The public reasonably expects supervisors to require banks to understand and properly manage their material risks, including financial risks from climate change.”

Powell did not explicitly mention his political perspective in his speech.

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

Meanwhile, inflation in the euro zone remains at a staggering 9.2% – although it eased between November and December. ECB President Christine Lagarde said last month that she expects interest rate hikes to rise “significantly further, as inflation remains very high and is expected to stay above our target for a long time to come”.

“If you compare it to the Fed, we have more ground to cover. We have more time ahead of us,” she added.

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

These three central banks are fighting under different conditions, but they share a similar battle strategy: keep squeezing.

Central bankers have defended the importance of the independence and credibility of their institutions, which has been criticized as policymakers are accused of having let high inflation run unchecked for too long.

Minutes of the Fed’s December meeting, released last week, noted that the monetary policy committee would “continue to make decisions meeting after meeting,” leaving options open for the size of rate hikes in the next policy decision on 1st. of February.

No policy makers predicted that it would be appropriate to lower the bank’s benchmark rate this year. And while officials welcomed the recent slowdown in inflation, they stressed that “a lot more evidence” was needed for a Fed “pivot”.

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

Thursday’s CPI for December – which will be the first check on inflation in the new year – will also provide useful clues to investors as to whether US price increases are slowing down enough.

Encouraging data could bolster consensus estimates calling for a 0.25 percentage point hike in interest rates in February, a minor change from December’s half-point hike and four previous three-quarter-point hikes.