Jackson Hole conference highlights divide on climate and inflation

The Federal Reserve’s Jackson Hole symposium concluded on Saturday with the proceedings highlighting a deep division between the Federal Reserve and international counterparts over the impact of climate change on inflation. In a conference dominated by the ongoing global price stability crisis, the contribution of fossil fuel dependence and worldwide drought to rising prices was ignored by Fed chair Jerome Powell in a speech outlining the Fed’s efforts to return inflation to its 2% target.

Held over two days, the theme of this year’s symposium was “Reassessing Constraints on the Economy and Policy”. The discussion centered around how bottlenecks and shortages have limited economic supply while fiscal and monetary policies have led to a surge in demand. Sessions on employment, output, fiscal constraints and central bank balance sheets were delivered by leading academics with international central bankers contributing to the final panel discussion.

However, despite the focus on inflation there was little reference to fossil fuel and climate-related impacts on the cost of living crisis with the exception of contributions from Agustín Carstens, general manager of the Bank for International Settlements, and Isabel Schnabel, European Central Bank (ECB) executive board member.

“Increasing extreme weather events and an interconnected global food supply system raise the risk of disruptions and higher, more volatile prices, not to mention human costs,” warned Carstens in a luncheon address to the gathering. “Expectations of a shift away from fossil fuels have deterred investment, threatening energy shortages before clean energy options can catch up to meet demand. This pushes up inflation.”

In a panel discussion on the post-pandemic policy outlook, Schnabel also pointed to climate change as a contributor to price instability. “The experience of recent years leaves no doubt that the incidence and severity of extreme and disruptive weather events are rising sharply, exposing the global economy to greater volatility in output and inflation,” she said, pointing to the severe drought currently affecting nearly two-thirds of EU territory and contributing to higher food prices.

Schnabel’s remarks came days after ECB president Christine Lagarde said that climate change is having a clear impact on inflation.

In contrast, Fed chair Jerome Powell was more traditional in his analysis and prescriptions, advocating higher interest rates, slower growth, and softer labour market conditions to bring down inflation while acknowledging “some pain to households and businesses.” Referring to Fed policies that successfully tamed US inflation over forty years ago, Powell said that “a lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year.”

Participants in the conference were met by activists from 350.org and other climate groups demanding that the Fed follow the ECB to take positive action on climate. Activists also approached Powell during a conference dinner, unfurling a banner calling on the Fed to end the financing of fossil fuels.