Fed Chair Jerome Powell Bucks Climate Change Global Trends as he Heads for a Second Term

Many of the questions Jerome Powell was asked at his Senate confirmation hearing last Wednesday would have been familiar to any Federal Reserve Chair on Capitol Hill: Where is it heading? What about inflation? How fast can interest rates rise?

Powell, who is seeking a second term, faced a question that highlighted the significant changes that could be coming to the economy as well as the powerful financial institution he runs: How does the Fed plan for dealing with the economic risks posed primarily by climate change?

These risks have been taken into account by central bankers around the globe, who now consider them when making decisions to ensure stability and safety of their economies. In 2019, the Swedish Central Bank sold off bonds it held in the Canadian province of Alberta and parts of Australia, citing the risk posed by the economies’ high Greenhouse gas emissions. The central banks of China, India, South Korea and New Zealand have sought to increase their purchases of “green” bonds. The Bank of France announced last year that it would increase its purchases of “green” bonds. End investments in coalto reduce its oil and natural gas holdings by 2024. Last year, the Bank of England began its first comprehensive “stress test” of the British financial system’s ability to manage climate change and the transition to a net-zero economy, with publication of the results May is expected.

The U.S. Federal Reserve’s Chairman, Powell, was tapped by President Donald Trump in 2018. He has done little more than acknowledge the dangers of climate change and study its role. In A report card from last yeaOil Change International led progressive environmental groups that concluded that the Federal Reserve – arguably the world’s most powerful central bank – had done less on climate change than any other major bank.

“Our role on climate change is a limited one, but it’s an important one,” Powell said at last Tuesday’sAudition by the Senate Banking Committee. “It is to ensure that the banking institutions that we regulate understand their risks and can manage them.”

Faced by progressive pressure, President Joe Biden stated his confidence that Powell would act on climate issues in November when he was nominated to serve a second 4-year term. “He’s made clear to me a top priority will be to accelerate the Fed’s effort to address and mitigate the risks… that climate change poses to our financial system and our economy,” Biden said.

However, many Democratic Senators remain skeptical. “The world is running out of time to deal with the climate crisis, and the Fed has an important role to play here, and I hope the Fed will step up,” said Sen. Elizabeth Warren (D-Mass.After Powell’s confirmation hearing, she grilled her. She has called Powell “dangerous,” and has vowed to oppose his confirmation. 

Powell, a Republican who was previously a Wall Street banker and was first appointed to the Fed by President Barack Obama in 2012. He is expected to have enough bipartisan support for confirmation. And with pressure building domestically and internationally for financial regulators to take a more active role in addressing climate change, Powell almost certainly will be the federal reserve chairman who sets the institution’s course in a critical decade for the drive to a net-zero carbon economy.

Climate is a New Challenge to the Ever-Evolving Fed

The Federal Reserve was founded more than 100 years ago with the primary purpose of ensuring the stability and soundness the then-shaky American banking sector. Over the years, the Federal Reserve’s role has evolved to include overseeing the entire economy.

During the Great Depression Congress gave more power to the Fed to manage the economy’s money supply. Later, the reserve was crucial in financing military spending by the United States of America and its allies in World War II. After oil shocks ravaged the global economy in late 1970s, the Fed finally intervened with high rates of interest to reduce inflation by two-digits. Experts believe this was late. The Fed infused money into the economy to stimulate recovery after the 1987 stock market crash and 2001 terrorist attacks.

“The President has very little effect on the economy,” Nobel Prize-winning economist Robert FogelIn 2004. “If you want to put blame or credit, the main person who influences the business cycle is the Head of the Federal Reserve Bank.” 

2008’s financial collapse was a turning moment that brought on new responsibilities for the Fed, and for central bankers all over the world. They couldn’t stabilize the economy with low interest rates alone; the rates already were at or near zero. The Fed and other central bankers turned to making large-scale purchases of bonds and mortgage-backed securities—a process known as “quantitative easing”—to increase money supply and boost economic activity. To combat the slowdown caused in part by Covid, more quantitative easing was initiated by the Fed.

Policymakers all over the globe agreed that central banks should do more than just respond in crisis situations. They should also be proactive in preventing future crises. The Dodd-Frank banking reform law (2010) in the United States gave new mandates to the Fed to examine the resilience of the financial sector.

For example, banks had long conducted “stress tests” internally, using hypothetical scenarios to assess whether they could withstand a crisis. To assess the resilience and strength of large banks, the Fed and other central banks were required to conduct systemwide stress tests. Since 2013, the Fed has Stress testing was done on a regular basis This section provides information from banks on how their balances would be affected by high inflation, high unemployment, and recession. Banks that fail to pass stress tests may be subjected a restriction until they have built up their capital reserves.

As central bankers’ powers expanded, it wasn’t long before climate action advocates, international bodies such as G20 Sustainable Finance Working GroupCentral bankers began to discuss the potential role of national financial institutions and regulators, possibly using new tools like quantitative easing or stress testing. Avoid the global financial crisisClimate change could lead to this. 

Citing heatwaves in North America, typhoons in Southeast Asia and droughts in Africa and Australia, Mark Carney, then-governor of the Bank of England, and François Villeroy de Galhau, governor of the Bank of France, issued a call to action in a 2019 open letter.

“The enormous human and financial costs of climate change are having a devastating effect on our collective wellbeing,” they wrote. “As financial policymakers and prudential supervisors, we cannot ignore the obvious risks before our eyes.”

Powell: ‘Stick to Our Knitting’

Around the globe, central bankers have made the first tentative steps to incorporate climate change into their decision making.

The Bank of France was the first bank to conduct a Climate stress testing system-wide2020. The Bank of England followed last year with what it described as a “learning exercise,” which would not be used to set new capital requirements. The Bank of England said that although it doesn’t intend to publish data for specific firms, it will release aggregate results of its exercise in May. (Activists stated that they believe these efforts are necessary. don’t go far enough; they’d like to see the stress tests used to make it more expensive for banks to lend to fossil fuel companies and carbon-intensive projects.)

Last month, Bank of Japan A total of $18 billion worth loans were offeredIt anticipates that the first of two-yearly auctions will be held to support climate change activities by financial institutions. The zero-interest loans can be rolled over until 2030 so that banks that boost their green and sustainable lending, in essence, providing a kind of “green” quantitative easing.

The European Central Bank (ECB), a large buyer for green bonds, will conduct its first climate stress test in this year. Christine Lagarde (ECB President) has stated that climate should also be considered in setting monetary policies. 

“Obviously, climate change has an impact on price stability,” she said In an interview last year. “It will have an impact on agricultural production, it will have an impact on where people live, it will have an impact on not only the way we live, but the cost of living, and that clearly has to be embedded into the analysis that we conduct.”

Lagarde added, “There are some traditional thinkers who believe that central banks should altogether stay out of that business and exclusively concentrate on inflation, and price stability. I strongly disagree with that myself.”

Powell, however, at the Fed has taken a different view and stated flatly Last year, at a forumClimate change is not considered when deciding monetary policies. He stated that the Fed is currently studying the climate implications to its role as a regulator and supervisor of financial institutions. To explore the issue, he has established two internal committees and the Fed has joined them. Network for Greening the Financial SystemThe International Organization of Central Bankers, which is studying their role in climate changes. However, he has not made any commitments to conduct a climate stress test and other steps.

At last week’s confirmation hearing, while Democrats pressed Powell on his plans for action on climate change, Republicans repeatedly admonished him to steer clear of what they called “political” issues, including climate change.

“What I worry the most about with the Fed is the mission creep that I think clouds and frankly complicates the main mission of price stability, if you’re having to sit around and hire people that are going to assess climate risk,” said Sen. Kevin Cramer (R-N.D.) 

Cramer, whose state is the nation’s No. Cramer, who is the nation’s No.2 oil producer, attacked the idea for a climate stress testing. “The natural outcome is that we’re going to somewhat transfer our climate guilt to other countries who don’t have our environmental and labor standards,” he said.

Powell’s response was sure to throw cold water on anyone’s hopes that the Fed would take a leading role in addressing climate change. “I agree with your principle, which is that we’ve got to stick to our knitting,” he said. “Climate is appropriate for us as an issue to the extent it fits within our existing mandates, in the sense of it’s another risk over time that banks are going to run. But the broader answer to climate change has to come from legislators and the private sector.”

Powell also said the possibility of financial instability resulting from the physical risks of climate change “doesn’t seem likely in the near term.”

Lael Brainard, a member of the Federal Reserve’s Board of Governors who is Biden’s pick for vice chairwoman, is seen as more open to integrating climate change into decision-making. However, she is a strong advocate for climate change integration in decision-making. Senate confirmation hearingLast Thursday, she did not endorse climate stress tests. Instead, she spoke about how the central bank might offer guidance to large institutions.

“We would not tell banks which sectors to lend to or which sectors to not lend to,” she said, “but we do want to make sure they are measuring, monitoring and managing their material risks.”

What can the Fed do for you? 

In addition to Powell’s reticence, the Fed’s history and unique legal framework make it harder for the U.S. central bank to engage in climate activity as aggressively as central bankers elsewhere in the world, some experts point out.

The 1998 establishment of the European Central Bank explicitly requires that the environment be considered when executing monetary policies. The Fed’s mandate on monetary policy, in contrast, is focused narrowly on promoting “the goals of maximum employment, stable prices, and moderate long-term interest rates.” The Bank of England has a specific mandate of “supporting the economic policy of Her Majesty’s Government.” But law and policy concerning the Federal Reserve has been aimed at maintaining its independence from the executive branch and thereby, the Biden administration’s climate policy.

“When people look around the world and say, ‘It seems like a lot of central banks are doing something, why not the Fed?,’ it’s because it doesn’t have that relationship to the executive branch. In fact, it’s quite the opposite,” said Christina Parajon Skinner, a professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School.

Skinner said she wouldn’t be surprised if the Fed uses climate scenario analysis in the future, although she believes it wouldn’t have the authority to make it the basis for forcing action by financial institutions.

“The central banks are extremely powerful institutions, and they’ve become more and more powerful since the financial crisis,” Skinner said. “And they’re very effective institutions. The Fed is the place to go if you need an immediate result. This applies not only to climate change but also to other policy issues. We are at a moment in time that the central banks are being sort of pulled to the center of many different debates that take them pretty far outside of their traditional wheelhouse.”

Many believe the Federal Reserve could take steps to address climate change, using its existing legal authority. Some activists would prefer to see the Fed encourage the financing of clean energies, while making lending for fossil fuel projects more expensive and setting higher capital standards. However, others believe the Fed can have an impact by taking less prescriptive measures. David Jones, who, as California’s insurance commissioner from 2011 to 2018, spearheaded greater disclosure requirements in that industry, said the Fed could immediately improve climate risk disclosure by banks, as well as conduct a climate stress test, perhaps borrowing from scenarios the European banks already have carried out.

“It’s financial regulatory malpractice not to take up the best practices available now to address climate change and climate risk,” said Jones, who now directs the Climate Risk Initiative at the University of California, Berkeley.

In any case, the pressure to take action is mounting. Financial Stability Oversight Council is a board made up of experts and financial regulators from both federal and state levels. It was established under the Dodd-Frank law. A report was released in October identifying climate change as an “emerging and increasing threat” to U.S. financial stability. One of the main recommendations was for the Fed and other financial regulators to increase their internal capacity and bring aboard personnel and knowhow to address climate risk.

Biden made A trio of nominationsThey are widely believed to be trying to move the Fed in more progressive directions on Friday. His naming of two black economists, Lisa Cook and Philip Jefferson, as his choices to fill open seats on the Fed board, and nomination of former fed governor Sarah Bloom Raskin to be the first woman in the Fed’s top job regulating banks came after a push by Democratic lawmakers for more diversity—and more openness to ideas like addressing climate change—at the Fed.

Ceres, an investor activist coalition, issued earlier this month More than a dozen recommendations for the Fed and other financial regulators. This includes providing guidance to financial institutions about identifying and monitoring climate risk. The Comptroller of the Currency was another agency responsible for bank regulation. Draft rules are being issued for the nation’s largest banks on how to engage in climate-related risk management.

Ceres has analyzed the risks for U.S. financial institutions from both the physical impact of climate change and the so-called “transitional” risk, the risk that their holdings in carbon-intensive industries will suddenly lose value as the world transitions from fossil fuels to clean energy sources. It found that the most important banks are More than $500 billionClimate risk exposure due to investments in sectors that are not adequately prepared for emission reductions in accordance with the Paris climate agreement. Additionally, the major U.S. bank institutions are implicated in climate risk exposure. Could lose more than $250 billion annuallyCeres concluded that climate change impacts like disruptions in supply chains and lower productivity as a consequence of events such as coastal flooding and power outages are major factors. Those findings were echoed in a report last fall by the Federal Reserve Bank of New York, which found that the indirect climate risk exposure for banks that lend to the oil and gas industry could be “Economically significant.”

TheLast week’s reportAccording to the National Oceanic and Atmospheric Administration, $145 billion in damages and 688 people died in the United States due to weather disasters in 2021. This highlights the need for the Fed to act immediately, Steven Rothstein, managing direct of the Fed. Ceres Accelerator For Sustainable Capital Markets.

“The world is literally on fire,” said Rothstein. “If the job of the Federal Reserve is the safety and soundness of our economy, and a full-growth economy and low unemployment, our economy cannot achieve those without addressing climate risks.”

A vote on Powell’s nomination is expected in the coming weeks in the Senate, where he can be confirmed with a simple majority.