U.S. Fed Charts Its Own Course on Climate Change, Too

U.S. News & World Report | October 2, 2019


CORPUS CHRISTI, Texas/ WASHINGTON (Reuters) – Dallas Federal Reserve President Robert Kaplan faced more questions on one particular topic than any other at a recent lunch with local business owners and community leaders on Texas’s Gulf Coast.

It wasn’t President Donald Trump’s escalating demands that the U.S. central bank lower interest rates, or Kaplan’s view of the U.S. economy that attendees at the lunch in Corpus Christi wanted most to know about. They wanted information on climate change.

Texas has suffered catastrophic floods and billions in related losses in recent years. Now, “it’s hard to meet with a business person or a city or a community leader in this state” who doesn’t have questions on climate change, Kaplan, a former Goldman Sachs investment banker and one of 17 Fed policymakers, said in response to a question at the Sept. 20 lunch.

It’s not just Texas. After devastating fires in Northern California and corrosive storms on the Carolina and Florida coasts, the Fed’s regional banks are delving deeper into how the earth’s warming will impact U.S. businesses, consumers and the country’s $17 trillion asset banking system.

That’s a sharp departure from the position of much of the Trump administration, which has rejected the science on climate change, installed climate science deniers in key roles including at the Environmental Protection Agency, censored or downplayed research on the risks of global warming, and rolled back regulations designed to limit greenhouse gas emissions.

The Fed, though, has a unique structure that means it operates more independently from the White House than Cabinet agencies.

While the Fed’s Washington-based Board of Governors is part of the federal government, its governors serve 14-year terms, outlasting any one president. The system’s 12 regional Fed banks are privately owned by local financial institutions, and operate under the board’s supervision, within the central bank’s overall mandate of achieving full employment and stable prices.

That independence gives the Fed great weight in local communities, even as climate change remains a politically-charged issue in some parts of the country. “There is a lot of information and statements being thrown around” about climate change, Elizabeth Chu Richter, an architect who moderated the Corpus Christi lunch last month. But “the Fed is objective; they work off the data they collect.”


Climate change research hasn’t previously been a major focus at the Fed.

Catherine Wolfram, the program director of the National Bureau of Economic Research’s Environment and Energy Economics Program, recalls giving a talk at the Fed’s headquarters in Washington in 2017.

Besides the environmental economist who invited her, she said, “there weren’t more than six other people who were even vaguely interested in the topic.”

Fast-forward two years. The San Francisco Fed is holding a conference on the economics of climate change, the U.S. central bank’s first, on Nov. 8, and it is already over-booked. Organizers plan to livestream the daylong event for those who miss the cut.

Academic papers presented at the event will weigh rising pollution’s effect on interest rates and global warming’s impact on economic growth, labor markets, and monetary policy.

“We’ve been facing severe weather-related events over the past two, three years, so I think our businesses are a little bit concerned about the potential costs of these disruptions and say they want to learn more about this,” said Sylvain Leduc, the San Francisco Fed’s chief of research.

“What we are trying to do here is go broad, try to tackle how climate risk is impacting the macroeconomy and the financial system,” he said.

Climate change is on the Fed’s priority list elsewhere as well. Researchers at the Richmond Fed last year concluded that hotter temperatures could slow economic growth, while staff at the San Francisco Fed have explored how to give banks more incentives to adapt to climate change.

In July, Fed Chair Jerome Powell told Congress the central bank incorporates its “cutting-edge” research on severe weather events into its supervision of banks, though he views climate change as more of a “longer-run” issue than a day-to-day one.

In January, the four living former Fed chiefs signed a letter endorsing a carbon tax, which would increase the cost of polluting fossil fuels, saying global climate change was “a serious problem calling for immediate national action.”

Minneapolis Fed President Neel Kashkari, a former Republican candidate for governor of California, also voiced support for a carbon tax in April, though he said climate change needs better solutions.

The annual Kansas City/Dallas Fed energy conference this October will, for the first time ever, include renewable energy on the agenda, in addition to the outlook for fossil fuels.


Though the U.S. central bank is taking the subject seriously, it remains far behind global peers, like the Bank of England and the Dutch central bank, who have led the way in calling for action to mitigate the potentially catastrophic effects of climate change on economic growth and financial stability.

As Paul Fisher, a former Bank of England policymaker who coordinated its climate change initiatives, puts it, the risks “are real for the economy whatever Trump says. If you’re investing money you need to be actively managing those risks.”

Most of the G20 central banks, including the European Central Bank and People’s Bank of China, have signed up to the Network for Greening the Financial System, an information-sharing group. The International Monetary Fund, whose majority shareholder is the United States, also joined last week.

The Fed has not, a decision that some observers say is a nod to the Trump administration’s stance on the issue. “The last thing the Fed needs to do right now is stoke the flames of antagonism between Trump and the central bank,” said Adam Tooze, a professor of economic history at Columbia University in New York.

“We are monitoring these issues and, as always, are in contact with our international counterparts to exchange views and better understand their thinking,” Fed spokesman Joe Pavel told Reuters. “We continue to review what the Federal Reserve can best contribute to international discussions on this issue.”


The attention to climate change at the Fed is part of a broader tradition of exploring issues not immediately associated with full employment or stable prices, but that have long-range economic implications. In the past, that’s included politically-sensitive research around inequality, demographics, immigration, and trade uncertainty.

The Fed’s approach to these hot-button issues has been to focus on the data and to try to stay under the political radar.

“Our job at the Dallas Fed is to explicitly stay out of the political sensitivities and the political aspects,” Kaplan noted in Corpus Christi. But the central bank needs to “understand the economic impact of the energy business, and alternatives, and some of the potential economic impact of severe weather events and climate change-related events and factor that into our assessment of the economy.”

Kaplan, who earlier this year converted the Dallas Fed to use wind-generated energy for 100% of its electric power needs, is among the strongest evangelists for more climate change research within the central bank.

Whether that research builds a case for infrastructure investments, green energy subsidies, carbon taxes, or anything else, he said, “I’ll leave it to other policymakers to decide.”

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