Blog: Reimagining the Federal Reserve – The American Prospect

This article is part of the Prospect roundtable on the future of the Federal Reserve.

Since spring 2020, we’ve awakened each day to a frightening new normal—a raging pandemic, deadly hurricanes, hellish wildfires, nightmarish regional deep freezes. Our new reality-based president reminds us that the climate crisis is an “existential threat to the planet.”

With the sweep of his pen, President Biden has introduced a flurry of climate-related executive orders, including one signed last month that requires financial regulators, including Treasury Secretary Janet Yellen and the Financial Stability Oversight Council (FSOC), to assess climate change risks to our federal financial system.

The Biden administration’s bold steps cleared a path for the Federal Reserve to take a leadership role among other global central banks, and during the Green Swan Conference put on by global central banks and financial regulators last Friday, it seemed that Fed Chair Jerome Powell was prepared to take that lead. “There is no doubt that climate change poses profound challenges for the global economy and certainly the financial system,” said Powell in his virtual remarks.

Yet Powell continues to resist the push from progressive organizations like Public Citizen and legislators like Reps. Mondaire Jones (D-NY) and Rashida Tlaib (D-MI) to increase the financial system’s resilience to climate risks.

Indeed, at the conference, Powell demurred in acknowledging that the U.S. central bank is already empowered to address climate risks, and does not have to wait for elected officials to grant permission. “We are not, and we do not seek to be, climate policymakers as such,” Powell said, making it clear he rejects the argument that the Fed can take the lead in addressing climate risks in our financial system.

However, as noted expert on the climate crisis and financial regulation David Arkush of Public Citizen reminds us, “[a]ddressing climate risk is … a critically urgent task for financial regulators and one for which they have both the legal authority and the tools necessary to act.”

ECB Takes the Lead in Addressing Climate Risk

Powell’s intransigence here is puzzling, in contrast to the reactions of his European Central Bank colleagues, who lack his hesitancy.

Luis de Guindos, vice president of the ECB, wrote in a recent blog post that central banks play a key secondary role to governments, by “ensur[ing] that the financial system is resilient to the transition to a low-carbon economy, by providing more and better information to market participants on the risks from climate change.”

A recent climate stress test conducted by the ECB revealed that climate change “represents a major source of systemic risk, particularly for banks with portfolios concentrated in certain economic sectors and, even more importantly, in specific geographical areas.”

Only recently has the Fed started making moves to assess systemic risk to financial markets caused by climate change. More than three years after other central banks began stress-testing for climate risk, the Fed is just coming around to the idea, and it took three years for it to join the Network for Greening the Financial System, a coalition of central banks dedicated to addressing the climate crisis, trailing dozens of other countries.

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As Federal Reserve governor Lael Brainard said in remarks earlier this year, “The long time horizon associated with climate change, the lack of historical data, the potential for sudden shifts in asset valuations, and the paucity of information on the climate-sensitivity of exposures complicate the translation of climate-related risks into measures of credit, market, liquidity, reputational, and operational risks.” That argues for immediate action, not the slow and halting manner of the Fed’s recent past.

Another Term for Powell?

Jerome Powell’s tenure ends in February, with reappointment or another nomination to be solidified by January 2022. Biden is expected to make an announcement as early as Labor Day.

According to Positive Money’s Green Central Banking Scorecard, the Fed got a D-minus, near the bottom among the G20 central banks, when evaluated on its comprehensive climate risk policies related to the Paris Agreement, including financial policy and leading by example.

In a supplement to the scorecard, U.S. climate and financial regulatory advocates detailed how the Federal Reserve had failed to use the powers it has to address the climate crisis.

It would be groundbreaking if the Fed would follow last month’s International Energy Agency report by ending financial support for all fossil fuel projects, and instead encouraging bank investment to focus its resources on limiting global temperature rise to 1.5 degrees Celsius, with a particular emphasis on lending to low-income communities and communities of color. These communities have historically suffered underinvestment due to discriminatory practices, and have also been disproportionately harmed by carbon-intensive industries while facing extreme climate risks, including climate-related displacement.

Waiting for a Climate Leader

Waiting for Chair Powell to morph into a climate champion is like Vladimir and Estragon waiting for Godot—it’s probably not going to happen. It’s clear President Biden needs to appoint a new Fed chair who will be committed to addressing the ways that climate change creates systemic risk, and be committed to the Fed’s mandate to mitigate that risk.

America needs a new Federal Reserve chair who can reimagine the role it can play in addressing systemic financial risk posed by this existential threat to human existence.

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