The Federal Reserve should “stick to its knitting”: that was the verdict delivered last week by Jay Powell, the US central bank chair, who stated that the Fed is “not a climate policymaker and never will be”. He argued that exceeding its remit to pursue “social benefits that are not tightly linked to our statutory goals” would risk the central bank’s independence. Such a position puts the Fed at odds, at first blush, with other major central banks such as the European Central Bank and the Bank of England. Both have prioritised the fight against climate change and taken steps to “green” their corporate bond holdings.
Powell is correct. But this does not make the ECB or BoE wrong. The essential thing is for independent central banks to stick to the remits they have been given by elected lawmakers. That is particularly true when their citizens are facing a cost of living crisis. Powell is right to fret that any additional duties that could distract from the task of ensuring price stability might jeopardise its independence. That freedom was granted to enable central bankers to take sometimes unpalatable decisions to raise interest rates to fight inflation, free from political considerations or pressure.
In truth, there is no real transatlantic schism on this point. The ECB, Fed and BoE all agree that the main proponents of policy when it comes to the climate emergency must be elected governments — something lawmakers ought to keep in mind. Central banks cannot be expected to be green policymakers through the back door.
Powell does concede that there is a valid, albeit narrow, role for the Fed in fighting climate change. As the BoE and ECB have done, the Fed’s banking supervisors also try to ensure that lenders’ balance sheets are resilient against the financial damage that climate change can wreak, be it from extending mortgages to homes on flood plains, or a sudden “fire sale” of brown assets. Such scrutiny is entirely proper when it comes to central banks’ duty to protect financial stability.
But it is around their monetary policy obligations where there is a divergence on climate change, or indeed on any other “social benefits”, 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 central banks’ bread and butter. The Fed’s mandate is tightly defined by Congress to support maximum employment, stable prices and moderate long-term interest rates — no more, no less.
While the BoE and ECB both have similar primary objectives, they also have sweeping secondary aims — as long as these do not interfere with their overriding duty to ensure price stability. In both instances, those secondary objectives expressly lay out a duty to combat climate change: in 2021 the BoE’s remit changed to include supporting the government’s ambition to achieve net zero by 2050. Meanwhile, the ECB is statutorily expected to support the general economic policies of the EU, from full employment and “social progress” to improving the environment. Even if the way in which the ECB and BoE are interpreting those objectives is debatable, the fact that they are acting to tackle climate change is appropriate under their respective legal frameworks.
The biggest transatlantic divergence is political. Powell is operating in an environment where progressives call on the Fed to do much more, while Republican lawmakers have accused it of over-reach. The ECB and BoE are freer in that respect. That may change, if they lose control of inflation. For now, they are also sticking to their knitting; it just happens that the patterns they are following are different.
