Economists Konstantinos Gavrilidis, Ramya Raghavan, and Jim Stock published a new paper, titled “The Macroeconomic Effects of Climate Policy Uncertainty,” stating that climate policy uncertainty curbs investments, output, and employment while increasing prices. They found that climate change denial has stagflationary effects that compound and complicate policy responses.

By analysing millions of newspaper articles dating back to the 1980s, these economists created a monthly index of US climate policy uncertainty that tracks legislative debates, regulatory reversals, and shifts in international climate commitments.

Their research found that when this index spikes, such as during the 2009 Waxman-Markey Cap and Trade Bill or the 2017 US withdrawal from the Paris Agreement, macroeconomic models indicated that businesses respond by cutting back on investment, scaling down production plans, and postponing hiring and research.

Simultaneously, the risk of future tightening in emission standards or compliance costs raises expected future production costs, which helps transmit the uncertainty into higher applied prices.

When company policies change unpredictably, companies become uncertain. They act or respond to policy uncertainty just like they would to a financial risk, such as currency swings or interest rate moves.

Firms related to climate change risks, such as energy producers, heavy manufacturers, car makers, and even big tech firms with large data centre footprints, don’t treat climate rules as a distant problem. They begin to adjust spending, borrowing, and hiring plans according to climate policy.

The report reveals that when climate policy uncertainty occurs, firms cut back on capital spending, resulting in fewer new factories, power plants, production lines, and renewable energy projects. This shift can lead to a 5%-15% drop in annual investments for exposed companies over a few years, depending heavily on the intensity of the regulatory back-and-forth.

Furthermore, there is a notable scale-back on research and development, particularly in clean tech. Since green energy often only becomes profitable under strict emission rules, this uncertainty inadvertently slows down innovation in several key areas, including battery storage, electric vehicles, and industrial decarbonisation.

In simple terms, when businesses can’t be sure what climate rules will look like in five to ten years, they stop treating climate policy just as a policy issue and start treating it as a real financial risk that affects how much they build, invent, hire, and borrow.

Companies seen as more vulnerable to climate rules often see their stock prices suffer or become more volatile, and their borrowing costs also rise slightly. Even analyst ratings turn a little bit more cautious.

The cost of uncertainty that businesses absorb is then fed back into the broader economy, making growth slower and transitions bumpier than they would be if there were clear, stable rules.

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The Monetary Authority of Singapore polled 25 economists, and their median forecasts predicted growth of 3.1% in the last quarter of 2024 and 2.6% in 2025.

Following third-quarter growth that exceeded projections at 5.4%, the trade ministry increased its 2024 GDP growth forecast to 3.5% last month from a previous range of 2.0% to 3.0%.

The MAS is expected to stick to its current monetary policy in its quarterly reviews in January, April, and July, according to the majority of economists polled.

Even though inflation decreased and growth increased in October, the MAS maintained its monetary policy settings.

Since a tightening in October 2022—the fifth consecutive tightening—it has not altered its policy.

Just 33% of respondents anticipate monetary policy to be loosened in January through a decrease in the slope of the Singapore dollar nominal effective exchange rate, or S$NEER, down from 50% in the September survey.

Singapore’s central bank determines the direction of the S$NEER’s policy band, which influences the value of the local currency relative to its major trading partners.

Core inflation this year was 2.8%, down from 2.9% anticipated in the September survey, while headline inflation for 2024 was 2.5%, down slightly from that forecast. According to the survey, core inflation in the last quarter of this year was 2.1%.

Compared to a year earlier, core inflation decreased to 2.1% in October, the lowest increase in nearly three years. Both headline and core inflation in 2025 are predicted by the economists polled to be between 1.5% and 1.9%.

Meanwhile, US President-elect Donald Trump has vowed to raise tariffs to as high as 20% on imports from around the world including Singapore.

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According to economists, a President making policy decisions for the Federal Reserve would most likely result in higher inflation. The Fed would probably come under pressure from most presidents to maintain its benchmark interest rate lower than it otherwise would, increasing inflation.

James Bullard, a former president of the Federal Reserve Bank of St. Louis and member of the Fed’s policy committee from 2008 to 2023, said, “The data is quite clear that you’re going to get greater and more volatile inflation eventually if you give up an independent central bank.”

The “stagflation” era served as a warning, according to Sarah Binder, a political science professor at Georgetown University and an authority on how politicians affect the Fed. She added that presidents Richard Nixon and Lyndon Johnson put pressure on the Federal Reserve to cut interest rates, which contributed to the double-digit inflation and economic stagnation of the 1970s.

She told Investopedia, “The past of the 1970s demonstrates that such type of political pressure contributed to releasing inflation for nearly a decade. While it’s not a given that the Fed will submit to Trump’s demands, it does put the Fed in a very vulnerable political position.”

The independence of the Fed

The Federal Reserve is a unique branch of the American government since it is intended to be somewhat immune to political influence.

A series of bank failures led to the Fed’s establishment in 1913 to stabilize the financial system. Over time, the central bank’s authority increased. These days, its duties include overseeing banks and, most importantly, determining the monetary policy of the world’s largest democracy.

In 1977, Congress gave the Fed a twin mandate: maintain full employment in the economy while controlling inflation. It primarily accomplishes this by influencing the fed funds rate, which establishes the interest rate at which banks in the country lend money to one another. This affects interest rates on a wide range of other loans across the economy, including personal and corporate loans like mortgages.

A committee consisting of a rotating group of one-year regional bank presidents and presidential appointees with 14-year tenure decides whether to raise or cut interest rates.

The Federal Open Market Committee (FOMC) is freer than other federal agencies to function as technocrats and make decisions based on what they believe to be sensible economic policy rather than political considerations because the president can only appoint a small number of FOMC members during any given term in office—at least in theory.

The goal of the Fed’s detractors has always been to give the other arms of government more authority over the central bank. They frequently contend that because of the Fed’s independence, the public cannot hold it accountable, rendering its governance undemocratic. The Fed’s economists have also come under fire for being unelected bureaucrats and for being ineligible to decide on matters of economic policy.

Should Fed be politicised?

The Fed has gained a lot of attention due to its gradual hike in the fed funds rate, which it used to control inflation that had grown well beyond its objective of 2%. Currently, the benchmark rate range has been at a 23-year high of 5.25%–5.50% since July 2023.

Because of the restrictive monetary policy’s contribution to lower inflation, investors and consumers now have hope that interest rate reductions are imminent. But before loosening policy, Fed policymakers have stated that they need further assurance that pricing pressures are under control.

Economists caution that a Fed under the president’s direction is more likely to allow inflation to spiral out of control.

According to Victor Li, a Villanova economics professor, presidents have every right to encourage the Fed to cut interest rates and have done so in the past, in part because election cycles force them to look short-term.

A president should be proud of the fact that the economy grows, the Fed lowers interest rates, loans become more affordable, consumers borrow more money to purchase more goods, businesses hire more workers, and the economy expands.

The inevitable hangover, however, sets in when business owners discover that their more affluent clientele can afford to pay greater rates, so they do. Even worse, economists have shown that because inflation is partially a psychological phenomenon, public perceptions of it can become self-fulfilling.

Li stated, “Inflation is a lagging indicator.” But when it does, it can quickly get out of hand and turn into hyperinflation if inflation expectations are no longer grounded. This is history’s lesson, and if it is not grasped, it will inevitably be repeated.

Li and other economists cited Richard Nixon as an example, who pushed Fed Chair Arthur Burns to maintain low interest rates in the run-up to the 1972 election. Burns cooperated even though he was a well-respected economist and ought to have known better. This contributed to the country’s 1970s double-digit inflationary wave.

How much should Fed be influenced?

In their book “The Myth of Independence: How Congress Governs the Federal Reserve,” Binder and colleague researcher Mark Spindel from Georgetown University noted that Fed officials do take the public’s opinion, political opinion, and financial markets into account when making decisions. Transcripts of FOMC sessions made available to the public five years later, reflect their worries.

Congressmen in Congress, to whom Fed officials are answerable, often pressure them to adjust interest rates during open hearings. But even if Congress has changed the Fed throughout the years, the FOMC still has the last word on monetary policy.

Bullard, the former president of the St. Louis Fed, stated that “if it came right down to it, the Congress could do whatever it wants with monetary policy, so in that sense, it is political.”

However, after considering this for the past 100 years, Congress chose to keep it apart from the daily ups and downs in politics.

The public’s perception that the Fed will maintain inflation at its long-term target of 2% is a major factor in the Fed’s capacity to control inflation. A president’s obvious thumbs-up on the scales may jeopardise that.

According to Binder, “the Fed’s difficulty is its legitimacy and credibility. All of this boils down to the public’s trust that the Fed is capable and will carry out its tasks methodically, that it won’t just flap in the wind, blown about by rival political parties or beliefs.”

Binder is also concerned that the Fed would overreact in the other direction, maintaining excessively high interest rates in an attempt to maintain its credibility, which would needlessly hurt the economy by making money too scarce.

Stories from across the globe

Chief economist at Pantheon Macroeconomics, Ian Sheperdson, cited Britain as an example, where the elected government controlled the central bank until 1997. The Bank of England underwent a more independent reform to its leadership structure that same year. Coincidentally, that year saw Britain’s inflation, which had historically been several percentage points higher than that of the United States and Germany, drop to par with its counterparts in the economy.

The International Monetary Fund, the UN’s financial arm, conducted a study of 17 Latin American countries in 2022 and discovered that those with more independent central banks often had lower inflation rates.

Another striking illustration of the connection between politics and inflation comes from Turkey. Tayyip Erdogan, the authoritarian leader, experimented with an unconventional economic theory: that cutting interest rates would lower inflation. Rather, the rate of inflation reached 85.5% in 2023 before the central bank started to implement a more conventional strategy and increased interest rates.

Congress would ultimately decide whether to alter the Fed’s organisational structure. Bullard stated that, based on his discussions with lawmakers, he believes there is a minimal probability of that occurring.

Bullard stated that in casual discussion, “Even folks that you think could be kind of more extreme, either on the left or the right, they’re quite supportive. I didn’t get the impression that they were considering fundamentally altering the Fed’s structure.”

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According to the latest economists’ panel, jointly conducted by the Munich-based ifo Institute and the Frankfurter Allgemeine Zeitung, 71 percent of the German economics professors surveyed described Donald Trump’s influence on the global economy as negative while 64 percent stated that this also applied to the US economy.

“Trump remains a phenomenon: he cuts a remarkably poor figure in office, and yet the US economy is performing well. This may be because Trump has implemented very little of his political programme to date,” said Niklas Potrafke, who supervises the panel and is Director of the ifo Center for Public Finance and Political Economy.

The 130 German economics professors, who took part in the survey, were very critical of Trump’s policy across the board. His policies for healthcare, protecting the environment, maintaining peace and security were rated poorly in the survey. German economists also believe that Trump’s policies have negative implications for social justice. This was in line with most of the survey participants’ expectations.

They saw the implications of Trump’s policy for employment as more or less neutral; and assessed his influence on the economic climate somewhat more favourably, although still slightly negative. German economists clearly rejected Trump’s trade policy.

Survey participants expect the lower and middle-income earners to emerge as the losers of Trump’s policies while high earners stand to gain. The prevention of illegal immigration was the only area in which economists’ responses were positive on balance.

Many German economists dislike Trump’s style, which was described by several survey participants as ‘disastrous’.

The measures taken by the Trump government are ‘airy-fairy, contradictory and naïve’ writes the trade economist Rolf Langhammer.

The Freiburg-based finance expert Bernd Raffelhueschen, by contrast, favours a more relaxed approach to Trump’s policies. In his view, things are rarely as bad as they seem.

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