Nov 23, 2021 - Energy & Environment

What's next for the Fed on climate change

Photo illustration of Jerome Powell wearing a green MAGA hat with the stitched phrase "Make America Green Again"

Photo illustration: Annelise Capossela/Axios. Getty Images photos: Andrew Caballero-Reynolds/AFP and Lev Radin/Pacific Press/LightRocket

The Federal Reserve is poised to increase its climate focus even as President Biden's nomination of Chairman Jerome Powell to a second term disappointed advocates of policies to tilt the economy away from fossil fuels.

Catch up fast: Biden on Monday announced Powell's nod and said he's tapping Lael Brainard — a Fed board member who's outspoken on climate — as vice chair.

  • "[Powell's] made clear to me [that] 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.

Why it matters: The Fed has broad powers to weigh and ameliorate climate-related risks to the financial system.

  • These risks include the physical damage from costly extreme weather events and the potential for stranded fossil fuel assets in the transition to cleaner energy.
  • However, it remains to be seen how far the Fed will go on climate, an area outside its traditional work that requires new staff expertise.

What we're watching: The Fed is already studying the risks that climate change poses to the financial system and has been deepening its work over the last year.

  • The Fed has set up two committees, one to study how climate change may affect the nation's economic stability and the other to examine the individual banks it oversees.
  • In late 2020, the Fed also joined the multilateral Network of Central Banks and Supervisors for Greening the Financial System.
  • Both Powell and Brainard have said the Fed may conduct "scenario analysis" of climate risks, possibly focusing on individual banks — but stopped short of calling for "stress tests" that activists want.
  • Reuters reported last week that the Fed has been pressuring banks to analyze their portfolios for climate risks and may release findings to the public in 2023.

What they're saying: "The risk is real and the systemic nature of that risk is pretty apparent already, and is only going to get more so," Dan Firger, managing director at Great Circle Capital Advisors, told Axios. "And I think the very smart people inside the Federal Reserve are keenly aware of that fact."

  • Ilmi Granoff of the ClimateWorks Foundation expects the Fed's scenario analyses to reveal the need for risk management strategies for the economy as a whole and individual financial institutions.
  • "I expect the Fed to start scrutinizing financial risks, macro and systemic risks and at individual financial institutions. ... They've created two high level committees with really, really serious people at the helm of them," he said.

The intrigue: The Fed's moves so far stop well short of what environmentalists want from the central bank and other financial regulators.

  • Groups including Evergreen Action and the Sierra Club say the Fed should increase the amount of capital banks must hold for their fossil portfolios. They want "portfolio limits" on the level of polluting assets banks can hold.
  • More broadly, Powell's nomination to a second term came despite criticism of his tenure from some Capitol Hill Democrats who are very active on climate.

Yes, but: Christina Parajon Skinner of the University of Pennsylvania's Wharton School expects Powell will be "attentive" to ways climate affects the Fed's mandates "while also staying within the boundaries of the law and therefore not pushing the Fed into a drastically new role."

  • She expects the Fed to analyze risks, be prepared to deal with them and weave climate considerations into supervisory work.
  • "The Fed does not have the authority to use its policy tools to attempt to mitigate climate change with its balance sheet, its regulatory might (via capital charges or otherwise), or through the moral suasion deployed under the guise of supervision," she said in an email exchange.

What's next: Powell and Brainard's nominations aren't the only climate puzzle pieces left to be put into place at the Fed.

  • There are three other vacancies on the Fed Board of Governors that Biden needs to fill. One of them, the vice chair for supervision, will play a lead role in overseeing the Fed's climate work.
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