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As historic wildfires sweep through parts of Sonoma wine country, a first-of-its-kind Federal Reserve summit hosted by the nearby San Francisco branch may reveal a central-bank shift in focus on climate change and its potential to deliver economic “shocks.”
Many of the world’s top central banks want to move the global financial system away from a reliance on industries — including fossil-fuel giants /zigman2/quotes/204455864/composite XOM +0.89% /zigman2/quotes/205871374/composite CVX +0.54% — that scientists largely have cited as posing increased risk for contributing to extreme changes in weather, large fires, rising sea levels and flooding.
Thus far, the Fed has been the laggard among is central-bank peers in this regard.
However, a rapidly changing climate may present just the kind of “shock” to the economic system that she and colleagues believe can no longer be ignored, Fed Gov. Lael Brainard said in prepared remarks to the summit.
“Because there is considerable uncertainty about the persistence, breadth, and magnitude of climate-related shocks to the economy, it could be challenging to assess what adjustments to monetary policy are likely to be most effective at keeping the economy operating at potential with maximum employment and price stability,” Brainard wrote in prepared remarks.
“Increasingly, it will be important for the Federal Reserve to take into account the effects of climate change and associated policies in setting monetary policy to achieve our objectives of maximum employment and price stability,” she said.
Not only are there short-term natural disasters like the wild fires in California, but “to the extent that climate change and the associated policy responses affect productivity and long-run economic growth, there may be implications for the long-run neutral level of the real interest rate, which is a key consideration in monetary policy,” Brainard said.
In one paper presented in San Francisco , the authors said climate change could subtract 7% from real world per-capita gross domestic product by 2100. A separate essay weighed the effectiveness of taxing carbon against subsidies that boosted wind and solar power. Yet another paper took the position that trade agreements should be more transparent on their effect in boosting greenhouse-gas emissions.
When it comes to climate change, “we’re actually just looking at the data,” Mary Daly, the president of the San Francisco Fed, told reporters ahead of the summit, according to the Wall Street Journal . With climate change, “it becomes prudent for us to consider what the fallout on the economy is, and on the payment system and on the supervision and regulation [of banks],” Daly said. “So I don’t see that as anything outside of our mission. In fact, I think it’s squarely in our mission and important for us to do that.”
Others have weighed in. “There has been an increased willingness to engage on climate-change issues,” New York Fed President John Williams agreed in remarks earlier this month. “As the Fed, we are careful not to tell Congress what to do, but we can inform the debate.”
Increased attention on the risks has made its way to the top of the central bank. In a letter to Congress earlier this year, Fed Chairman Jerome Powell wrote that “over the short term, these events have the potential to inflict serious damage on the lives of individuals and families, devastate local economies (including financial institutions), and even temporarily affect national economic output and employment.” He added, “As such, these events may affect economic conditions, which we take into account in our assessment of the outlook for the economy.”
For its part, the Trump administration has been rolling back regulations that have direct impacts on energy sectors, including undoing Obama-era limits on coal. And earlier this month, the White House began the official steps to withdraw the U.S. from the largely globally embraced Paris climate accord, which the president has said isn’t uniformly enforced.
The time lapse between U.S. seriousness toward climate risks and earlier attention from others in power haven’t gone unnoticed.
Bank of England Gov. Mark Carney said in an October speech in Tokyo that central banks will have to consider the physical risks of climate change when weighing monetary policy. That ranges from the impact on mortgages from flooding to severe weather’s toll on the pricing of government bonds.
Patrick Honohan, nonresident senior fellow at the Peterson Institute for International Economics, former governor of the Central Bank of Ireland and a member of the governing council of the European Central Bank from September 2009 to November 2015, has written recently to soothe central bankers from the notion that wading into climate-change issues will sully their political independence in setting monetary policy, saying central banks have been behind the curve of society’s response to these issues.
“Many central bankers will balk at the idea, fearing a damaging loss of independence and a dangerous distraction from their core competencies. These are clearly valid and important concerns,” he said. “But the secondary mandates, whether explicit or implicit, of central banks arguably warrant attention to large systemic issues like climate change and inequality, to the extent that these can be significantly influenced without detracting from the primary goals of monetary policy.”