The Federal Reserve should “stick to its cloth”: that was the verdict delivered last week by Jay Powell, the US central bank chairman, who claimed that the Fed “is not and never will be a climate policymaker ”. He argued that exceeding his mandate to pursue “social benefits that are not closely linked to our statutory objectives” would put the central bank’s independence at risk. Such a position puts the Fed at odds, on its face, with other major central banks such as the European Central Bank and the Bank of England. Both have prioritized the fight against climate change and have taken steps to “green” their holdings of corporate bonds.
Powell is right. But this does not make the ECB or the BoE wrong. What is essential is that independent central banks stick to the powers that have been given to them by elected legislators. That’s particularly true when your citizens are facing a cost-of-living crisis. Powell is right to worry that any additional obligations that might divert attention from ensuring price stability could jeopardize his independence. That freedom was given to allow central bankers to make sometimes unpleasant decisions to raise interest rates to fight inflation, free of political considerations or pressure.
In truth, there is no true transatlantic schism on this point. The ECB, Fed and BoE agree that the main advocates of policy when it comes to the climate emergency should be elected governments, something that policymakers need to keep in mind. Central banks cannot be expected to be green policymakers through the back door.
Powell admits that the Federal Reserve has a valid, if narrow, role in the fight against climate change. As the BoE and the ECB have done, the Fed’s banking supervisors are also trying to ensure that lenders’ balance sheets withstand the financial damage that climate change can cause, whether it be from mortgages on floodplain homes or from a sudden “forced sale”. ” of brown assets. Such scrutiny is entirely appropriate when it comes to the duty of central banks to protect financial stability.
But it is around his monetary policy obligations that there is a divergence on climate change, or indeed on any other “societal benefit”, as Powell puts it. Financial stability is intertwined with monetary policy: instability in the former can affect the transmission of the latter. But monetary policy is the bread and butter of central banks. The Fed’s mandate is strictly defined by Congress to support maximum employment, stable prices, and moderate long-term interest rates, no more and no less.
While the BoE and the ECB have similar primary objectives, they also have broad secondary objectives, as long as they do not interfere with their primary duty to ensure price stability. In both cases, those sub-targets expressly state the duty to combat climate change: in 2021, the BoE’s mandate changed to include support for the government’s ambition to achieve net zero by 2050. In the meantime, the law is expected to the ECB supports the EU’s general economic policies, from full employment and “social progress” to improving the environment. Even if the way the ECB and BoE are interpreting those goals is debatable, the fact that they are acting to address climate change is appropriate under their respective legal frameworks.
The biggest transatlantic divergence is political. Powell is operating in an environment where progressives are calling on the Fed to do much more, while Republican lawmakers accuse it of overreaching. The ECB and the BoE are freer in this regard. That may change if they lose control of inflation. For now, they’re also sticking to their knitting; it just so happens that the patterns they are following are different.