The U.S. Federal Reserve’s Take on Greening the Economy: It’s Not Our Job

(Reuters) – The US Federal Reserve lags other major central banks in the fight against climate change, even as President Joe Biden pledges to take a ‘whole-of-government’ approach and fights to save his ambitious agenda climate change as world leaders meet in Glasgow to discuss responses to rising global temperatures.

In recent years, the Fed has only begun to examine the impact of changing weather conditions on its ability to do its job, which includes protecting the financial system through banking regulation and tackling economic shocks through policy. monetary.

And while it devotes more effort to studying climate-related impacts, it treats climate risk as another element that affects the economic and financial landscape, such as trade or childcare policy, rather than like anything the Fed could try to shape.

This puts it far behind its peers who are gearing up to buy green assets, crack down on fossil fuel lending, and push companies toward low-carbon choices.

The reluctance to prioritize action on climate risk by the world’s most powerful central bank will have consequences, analysts and activists say, not only for the U.S. economy but for a global financial system whose biggest actors are in New York.

“Yes [the U.S.] are lagging behind, it won’t be good for our markets, it won’t be good for our businesses, ”said Sanjay Patnaik, Brookings Institution Fellow in Climate Policy. “The United States does not want to fall behind, otherwise our financial system will be more vulnerable to climate risk.”

Fed policymakers could catch up relatively quickly “if they fully engage,” he said, including implementing stress tests to assess banks’ vulnerability to climate risks such as temperatures higher or exposure to loans financing fossil fuels. The Bank of England has already started these tests, with a view to using the results to encourage banks to be better prepared.

Such tests could fall within the Fed’s financial stability jurisdiction, and Fed officials have said they will explore the possibility. But, wary of backlash on what is a political problem in the United States, they maintain that it’s up to Congress, not them, to get companies to go green.

As Fed Chairman Jerome Powell summed up this summer: “We are not and we do not seek to be climate policy makers as such.

LET OTHERS LEAD

Last year, the Bank of England and the European Central Bank published comprehensive plans to help manage the transition to a greener economy, including using their purchasing power of assets to selectively benefit businesses. less polluting.

In contrast, the Fed, the central bank of the largest greenhouse gas producer, remains stuck near the departure gate. It was the last major central bank to join the Network for Greening the Financial System when it joined in December 2020, and has just started an effort to analyze financial stability risks from climate change, but does not has so far adopted no new policies to address 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 were critical risks,” San Francisco Fed President Mary Daly said recently. His bank has several economists leading the charge at the Fed on climate change research.

Others, such as the ECB and the People’s Bank of China, have launched green bond programs – buying debt to finance environmentally friendly projects – to foster a transition to alternative energy. The Fed considers that such policies go beyond its economic and financial stability mandates.

Daly acknowledged that as fire seasons lengthen, droughts worsen, and inclement weather disrupts economic activity further, the Fed may need to respond with more assertiveness.

“If climatic effects occur and they slow down the growth of our economy and put us below our potential, then it would be our job to lean against the risks,” she said, although she added that this is different from direct climate risk mitigation.

The role of the Fed is “not to even pull on the levers that would do that.” It’s really to be students of it, so we’re well prepared, ”said Daly.

CALLS TO ACTION

Activists protested at many regional Fed banks and the Fed Board in Washington last Friday, demanding more action and replacing Powell with a more climate-focused leader. Powell is awaiting Biden’s decision on whether or not to appoint him for a second term, with critics viewing his claim of climate change as a “longer-term problem” as a black mark against him.

“What we’re asking for is an aggressive level of regulation that we think it doesn’t have an appetite for,” said Kathleen Brophy, senior strategist at the Sunrise Project, a group of young environmental activists helping to organize events. “They’ve certainly stepped up this issue for sure – but that doesn’t correspond to the urgency.”

Others point out that the Fed remains stuck between an administration with a much bolder climate change agenda than it was in Trump’s days and a Congress where Republicans and a few Democrats oppose any action on climate change.

Even the small steps taken so far have drawn some criticism.

In a letter to Daly, Republican Senator Pat Toomey called the bank’s climate change research “politically charged” and called on the Fed to drop what he called mission drift. .

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

But while the Fed’s mandate is narrow enough, its responsibilities are broad, and that’s where it can take a stance on the climate, analysts say.

“I think the Fed can and should be ahead, in the sense that it’s their job to oversee the banks,” said Paul Fisher, a former Bank of England policy maker who coordinated his climate initiatives. “Climate change is clearly a material threat to banks and they need to watch this… supervisors should take care of this quietly in the background. Most banks recognize that this is a financial risk. It shouldn’t be so controversial.

And the Fed is continuing its exploratory path. In October, he signed a report on climate-related financial risks with other US regulators who, for the first time, presented global warming as a financial risk.

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