The U.S. Federal Reserve's take on greening the economy: Not our job
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[November 02, 2021]
By Ann Saphir and Lindsay Dunsmuir
(Reuters) - The U.S. Federal Reserve trails
other major central banks in tackling climate change, even as President
Joe Biden pledges a "whole of government" approach and fights to salvage
his ambitious climate agenda as global leaders meet in Glasgow to hash
out responses to rising world temperatures.
In recent years the Fed has only begun to look at how changing weather
patterns impact its ability to do its job, which includes safeguarding
the financial system through bank regulation, and combating economic
shocks through monetary policy.
And while it is devoting more effort to studying climate-related
impacts, it treats climate risk as just another element that affects the
economic and financial landscape, like trade or childcare policy, rather
than as anything the Fed might try to shape.
That puts it well behind its peers who are gearing up to buy green
assets, crack down on fossil-fuel lending, and push companies toward
lower-carbon choices.
The hesitance to prioritize action on climate risk at the world's most
powerful central bank will have consequences, analysts and activists
say, not just for the U.S. economy but for a global financial system
whose largest actors are in New York.
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"If [the U.S.] are laggards, it won't be good for our markets, it won't
be good for our companies," said Sanjay Patnaik, a Brookings Institution
fellow specializing in climate policies. "The U.S. doesn't want to fall
behind, or our financial system will be more vulnerable to climate
risk."
Fed policymakers could catch up relatively quickly "if they engage
fully," he said, particularly by implementing stress tests to gauge
banks' vulnerability to climate risks such as higher temperatures or
exposure to loans financing fossil fuel. The Bank of England has already
started such testing, with a view to using the results to nudge banks to
be better prepared.
Such tests could fall under the Fed's own remit for financial stability
and Fed officials have said they will explore the possibility. But,
leery of blowback on what is a fraught U.S. political issue, they
maintain it's up to Congress, not them, to incentivize businesses to go
green.
As Fed Chair Jerome Powell summed it up this summer: "We are not and we
don't seek to be climate policymakers as such."
LETTING OTHERS LEAD
In the past year, the Bank of England and the European Central Bank have
released comprehensive plans to help manage the transition to a greener
economy, including using their asset-buying clout to selectively benefit
less-polluting companies.
By contrast, the Fed, central bank to the largest greenhouse-gas
producing country, remains stuck near the starting gate. It was the last
major central bank to sign up to the Network for Greening the Financial
System when it joined in December 2020, and has only just begun an
effort to analyze financial-stability risks from climate change, but so
far embracing no new policies to address it.
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"When I think about why are other banks ahead of us really – and they
are – it's because in those governments, they decided some years back
that these are critical risks," San Francisco Fed President Mary Daly
said recently. Her bank has several economists leading the charge at the
Fed on climate-change research.
Others such as the ECB and People's Bank of China have started green
bond programs -- purchasing debt to finance environmentally friendly
projects -- to nurture a transition toward alternative energy. The Fed
views such policies as beyond its economic and financial stability
mandates.
Daly acknowledged that as fire seasons lengthen, droughts deepen, and
severe weather disrupts more economic activity, the Fed may need to
respond more assertively.
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![](../images/110221PIX/news_h15.jpg)
Climate change activists voice their opposition to U.S. President
Joe Biden reappointing Jerome Powell to serve a second four-year
term as the chairman of the Federal Reserve and demand Biden appoint
a climate advocate, during a rally outside the Federal Reserve in
Washington, U.S., October 29, 2021. REUTERS/Leah Millis
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"If climate effects occur and they are bridling the
growth of our economy and putting us below our potential, then it
would be our job to lean against the risks," she said, although she
added that's different to mitigating climate risk directly.
The Fed's role is "not to even pull levers that would do that. It's
really to be students of it so we are well prepared," Daly said.
CALLS FOR ACTION
Last Friday, activists demonstrated at many of the regional Fed
banks and at the Fed Board in Washington, demanding more action and
the replacement of Powell with a leader more focused on climate.
Powell awaits Biden's decision on whether to nominate him for a
second term, with critics seeing his assertion of climate change as
a "longer-term issue" as a black mark against him.
"What we are pushing for is an aggressive level of regulation that
we don't think he has the appetite for," said Kathleen Brophy,
senior strategist at the Sunrise Project, a youth environmental
activist group helping to organize the protests. "They have
definitely stepped up on this issue for sure – but it doesn't match
the urgency."
Others point out the Fed remains caught between an administration
with a much bolder climate change agenda than in the Trump era and a
Congress where Republicans and a few Democrats oppose action on
climate change.
Even the small steps taken so far have drawn some rebukes.
In a letter to Daly, Republican Senator Pat Toomey called the bank's
climate-change research "politically charged" and asked the Fed to
abandon what he termed mission creep.
"Such activities are inconsistent with its statutory
responsibilities; only Congress has the authority to reform the
Federal Reserve or modify its mission," Toomey said.
But while the Fed's mandate is fairly narrow, its responsibilities
are wide, and this is where it can take a stand on climate, analysts
say.
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"I think the Fed can and should be ahead, in the sense of that it's
their job to supervise banks," said Paul Fisher, a former
policymaker at the Bank of England who coordinated its climate
initiatives. "Climate change is clearly a material threat to the
banks and they have to supervise that... supervisors ought be
getting on with this quietly in the background. Most of the banks
recognize it's a financial risk. It shouldn't be that
controversial."
And the Fed is forging ahead on its exploratory path. In October it
signed on to a report on climate-related financial risk with other
U.S. regulators that, for the first time, framed global warming as a
financial risk.
"That's the major contribution of the...report," Patnaik said. "How
do you get people to care about something? You tell them it's a risk
to their livelihood and their assets."
(Reporting by Ann Saphir and Lindsay Dunsmuir; Editing by Dan Burns
and Andrea Ricci)
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