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The Fed’s Opinion on Greening the Economy: Not Our Job

Nov. 2 (Reuters) – The US Federal Reserve is lagging behind other major central banks in fighting climate change, even as President Joe Biden promises a “whole government”  -proach and is fighting to save his ambitious climate agenda while the global heads of state and government meet in Glasgow to let off steam and react to rising world temperatures.

In recent years, the Fed has only just begun to study how changing weather conditions will affect its ability to perform its mission, which includes securing the financial system through banking regulation and combating economic shocks through monetary policy.

And while she is more concerned with studying climate-related impacts, she treats climate risk only as another element that affects the economic and financial landsc -e, such as trade or childcare policies, rather than something the Fed could try to sh -e.

That puts it way behind its peers as they prepare to buy green assets, crack down on fossil fuel credits, and encourage companies to make lower-carbon decisions.

The reluctance to prioritize action against climate risk at the world’s most powerful central bank will, analysts and activists say, have ramifications not only for the US economy, but also for a global financial system whose major players are based in New York.

“If [the U.S.] It won’t be good for our markets, it won’t be good for our companies, “said Sanjay Patnaik, a climate policy fellow at the Brookings Institution.” The US doesn’t want to fall behind, or our financial system will be more vulnerable to climate risk . “

Fed leaders could catch up relatively quickly “if they are fully committed,” he said, particularly by running stress tests to gauge banks’ vulnerability to climate risks such as higher temperatures or loans to finance fossil fuels. The Bank of England has already started such tests to use the results to encourage banks to better prepare.

Such tests could fall within the Fed’s remit for financial stability, and Fed officials have announced that they will be looking into the possibility. But, suspicious of setbacks on a sensitive US political issue, they claim it is up to Congress, not them, to incentivize companies to go green.

Fed Chairman Jerome Powell summed it up this summer: “We are not and do not want to be climate policy makers as such.”


Last year, the Bank of England and the European Central Bank released comprehensive plans to manage the transition to a greener economy, including using their asset buying clout to selectively benefit less polluting companies.

In contrast, the Fed, the central bank of the largest greenhouse gas producing country, remains in the starting blocks. It was the last major central bank to join the financial system greening network when it joined in December 2020 and has only just started analyzing the risks to financial stability from climate change but has not yet taken any new policy measures it.

“When I think about why other banks are really ahead of us – and they are – it’s because these governments decided a few years ago that these are critical risks,” said San Francisco Fed President Mary Daly. recently. Your bank has several economists who lead climate research at the Fed.

Others like the ECB and the People’s Bank of China have launched green bond programs – buying bonds to fund green projects – to encourage the transition to alternative energy. The Fed sees such a policy as beyond its economic and financial stability mandates.

Daly acknowledged that the Fed may need to act more decisively as the fire season extends, droughts intensify and severe weather disrupts continued economic activity.

“If climate effects occur and they slow down the growth of our economy and bring us below our potential, then it would be our job to defend ourselves against the risks,” she said, although this is different from directly mitigating the climate risk.

The Fed’s role is “not even to pull the levers that would do that. It’s real to deal with it so we’re well prepared,” Daly said.


Activists demonstrated at many regional Fed banks and the Fed Board of Directors in Washington last Friday, calling for more action and the replacement of Powell with a more climate-focused leader. Powell awaits Biden’s decision to nominate him for a second term, with critics seeing his claim of climate change as a “longer-term problem” as a black mark against him.

“We’re pushing for an aggressive level of regulation that we don’t think he has an  -petite for,” said Kathleen Brophy, senior strategist at the Sunrise Project, a youth environmental activist group helping organize the protests. “You have definitely stepped up this topic – but it does not correspond to the urgency.”

Others point out that the Fed is still caught between a government with a much bolder climate change agenda than it was in the Trump era and a Congress where Republicans and some Democrats oppose action on climate change.

Even the small steps that have been taken so far have drawn some rebukes.

In a letter to Daly, Republican Senator Pat Toomey described the bank’s climate research as “politically charged” and called on the Fed to abandon what he called Mission Creep.

“Such activities are contrary to their legal responsibilities; only Congress has the power to reform the Federal Reserve or change its mission,” Toomey said.

But while the Fed’s mandate is pretty tight, its responsibilities are wide-ranging, and that’s where it can take a position on the climate, analysts say.

“I think the Fed can and should be ahead in the sense that its job is to oversee the banks,” said Paul Fisher, a former Bank of England politician who coordinated its climate initiatives. “Climate change is clearly a material threat to banks and they need to monitor it … regulators should be quiet behind the scenes. Most banks recognize that it is a financial risk. It shouldn’t be so controversial.” “

And the Fed is pushing ahead with its exploratory course. In October, she signed a report with other US regulators on climate-related financial risks, which for the first time identified global warming as a financial risk.

“That is the main contribution of the … report,” said Patnaik. “How do you get people to care about something? They tell them it is a threat to their livelihood and property. “

Reporting by Ann S -hir and Lindsay Dunsmuir; Editing by Dan Burns and Andrea Ricci

Our Standards: The Thomson Reuters Trust Principles.

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