Breakingviews - Jay Powell has golden chance to avow independence

Federal Reserve Board Chairman Jerome Powell testifies before a Joint Economic Committee hearing on "The Economic Outlook" on Capitol Hill in Washington, U.S., November 13, 2019. REUTERS/James Lawler Duggan

NEW YORK (Reuters Breakingviews) - Federal Reserve Chairman Jay Powell is channeling Groucho Marx when it comes to climate change. The U.S. central banker seems to be following the comedian’s quip that he would “refuse to join any club that would have me as a member.” But there are good reasons for Powell to see sense and nudge the Fed into the Network for Greening the Financial System in 2020.

Founded two years ago, this 50-plus global group of central banks and other regulators wants to focus the financial sector’s mind on environmental and climate risks and encourage the industry to support the switch to a greener economy. Trying to keep the planet from frying is a noble cause and even hydrocarbon-dependent countries, like the United Arab Emirates and Canada, have sent emissaries to figure out how global warming will impact banking supervision and macro-financial policy.

Fed Governor Lael Brainard said in November the U.S. central bank was in discussions about how it might participate in the network. But there is no good official reason why it hasn’t already signed up. Some at the Fed worry that tackling climate change is a diversion from its mandate of maximizing employment and ensuring price stability. And Powell told Congress in April that climate risks don’t “fit neatly” into his financial stability duties. Neatness hasn’t, however, prevented the Fed from past diversions.

That leaves an impression the true motive for aloofness is a reluctance to tangle with President Donald Trump, who is pulling the United States out of the 2015 Paris climate accord. If this is the reason, Powell is doing a disservice to America’s financial institutions, which are among the world’s largest. It deprives them of some of the best practices agreed to by the body’s members, while cutting them out of their formulation altogether.

Joining the network would have the added benefit of broadcasting the Fed’s independence from political interference. Powell has cut rates even though the U.S. economy is relatively healthy and yet still gets bashed by Trump. Taking the central bank into a multilateral dialogue on an issue that Trump once called a “hoax” might defuse criticism that the central bank has been too malleable on interest rates. Brickbats will fly anyway. Better to do the right thing come what may.

This is a Breakingviews prediction for 2020. To see more of our predictions, click here:

This article has been corrected to refer to the United Arab Emirates rather than Abu Dhabi in the second paragraph.


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