Jerome Powell's Declaration of Independence

Remember back about four or five years ago (was it really that long ago?) we heard a lot about how the Federal Reserve’s sacrosanct independence was being threatened because the incumbent in the White House at that time was trying to influence the Fed’s monetary policy?

We don’t hear that much about it anymore since the Oval Office and Congress switched sides, although the threats against that independence have grown even louder, largely because they don’t get reported on to nearly the same degree.

For example, last fall the chairman of the Senate Banking Committee, Sherrod Brown, and the then chairman of the House Financial Services Committee, Maxine Waters, both sent letters to Fed Chair Jerome Powell decrying his recent policy of raising interest rates by more than 400 basis points since March to combat inflation. “You must not lose sight of your responsibility to ensure that we have full employment,” Brown wrote.

Around the same time Sen. Elizabeth Warren, another Democrat, said Powell “risks pushing our economy off a cliff.” Warren, who loudly voted against Powell’s reappointment as Fed chair, added, “There is a big difference between landing a plane and crashing it.”

I suppose they have a right to criticize Fed policy as much as anyone else, although that right should extend to members of both parties. To his credit, Powell has largely kept silent or muted his comments on these attacks.

But now it appears that Powell believes he is being pushed too far. Criticizing the Fed for the way it conducts monetary policy to maintain stable prices and full employment—its legal mandate from Congress, after all—is one thing.

But to force the Fed to go way beyond its mandate and do something that is the rightful purview of Congress is an entirely different matter. And Powell said he won’t stand for it.

I’m talking about the desire of many progressives and environmentalists to have the Fed impose their views on climate change on the banks the Fed regulates and the customers those banks serve.

If they get their way, the Fed would be able to decree, for example, that J.P. Morgan Chase or Bank of America would no longer be able to make loans to the likes of Exxon and Chevron or any other fossil fuel producer—or any other company or industry they don’t like.

But at a symposium on central bank independence in Sweden last week, Powell said in no uncertain terms that “We are not, and will not be, a ‘climate policy maker.’”

“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,” Powell said. The Fed, he added, “does have narrow, but important, responsibilities regarding climate-related financial risks. These responsibilities are tightly linked to our responsibilities for bank supervision. But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals. We should ‘stick to our knitting’ and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities.”

Wow. No wonder Warren voted against him.

But that doesn’t mean those Democrats critical of Fed monetary policy don’t have a point.

Indeed, in its fight to rein in inflation, the Fed has largely abandoned its second mandate from Congress, namely promoting full employment.

It seems willing to sacrifice the recent gains that workers, mostly those at the lowest end of the pay scale, have managed to achieve in the past two years or so in terms of more jobs and higher wages, as if those are what’s causing inflation and not profligate government fiscal and monetary policies.

This certainly adds fuel to the argument that whether intentionally or not, Fed policies mostly benefit the wealthiest Americans, although in this case it clearly is intentional. 

Until recently, when inflation finally showed that it was anything but transitory, the Fed spent most of the past 15 years inflating asset prices that mostly benefited the most well off, even as wage gains lagged. Now that wages have started to accelerate, the Fed wants to step on the brakes and bring this progress to a halt. 

It also raises the question whether wage gains are necessarily and by definition inflationary. Workers are only playing catch-up after years of being underpaid, which certainly held inflation in check.

By the same token, fewer people are working these days — the labor force participation rate was only 62.3% in December — which, in a growing economy, would imply that productivity is going up, which by definition is not inflationary. It's only when productivity goes down and wages are rising is it inflationary. 

So trying to fight inflation by throwing people out of work is not only cruel and unfair but also unproductive and unnecessary.

It's great that Powell won’t allow the Fed to get pushed around by the climate change gang. Now it really needs to focus on the real main drivers of inflation, which are too much money in the system and runaway federal spending.

The Fed has a lot of control over the first part but very little over the second, which is where Congress needs to help.

George Yacik Contributor

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.