Federal Reserve Declines to Become Climate Regulator

Most agencies can either do one thing well or many things poorly. For example, the Federal Reserve would be perfectly capable of keeping inflation low if that was its only job. It has all the tools, data, and knowledge it needs, but that isn’t their only job. It has a dual mandate to also keep an eye on the unemployment rate, which means it is often required to stimulate the economy during downturns. Usually, stimulus means increasing inflation, directly contradicting the Fed’s low inflation mandate.

The Fed’s massive COVID stimulus program is behind most of today’s high inflation. It had to make a choice between low inflation and stimulus, since in the short run it couldn’t have both. It chose stimulus, and we see the results today.

The natural solution to this muddle is to simplify the Fed’s mission and have it focus only on inflation. Other agencies already have hundreds, if not thousands, of stimulus programs for dealing with unemployment and downturns, but that’s not the way Washington works.

Instead, there are proposals for the Fed to add more issues to its plate, like climate change. It would then use monetary policy to advance those goals, for example by punishing and rewarding banks based on their energy investments.

Again: An agency can do one thing well or many things poorly.

These proposed mission expansions are in line with the Biden administration’s whole-of-government management philosophy, which rejects specialization in favor of using every available tool to work toward policy goals. My colleague Wayne Crews  and I have written before about whole-of-government initiatives. So did Adam Smith in the opening chapter of The Wealth of Nations, which explains the division of labor.

Fortunately, the Federal Reserve has more sense than the political branches. Fed Chairman Jerome Powell said yesterday in a speech, “We are not, and will not be, a ‘climate policymaker.’” Instead, he will stick to the dual mandate Congress has already given the Fed.

Even so, the Fed still has two committees devoted to climate issues, and will soon run a pilot program to test how climate disasters would affect the banking system.

While it would be best for the Fed to have a single inflation mandate, the current Congress is unlikely to pass something so sane and reasonable. Still, it is reassuring that Fed leadership is closer to Adam Smith than to the current administration on the whole-of-government philosophy.

For more on improving monetary policy, see the inflation chapter in CEI’s new Agenda for Congress.