The Federal Reserve has increased its research into managing risks related to climate change, but does not see them as a “near-term” threat, chairman Jerome Powell told US lawmakers on November 14.
Powell told the lawmakers that climate change does not have any near-term implications for monetary policy. The Fed recognises that over time climate change could affect its key policy tool, he said, but it is not something it is considering right now.
He also stressed that climate change was an area where lawmakers, rather than central bankers, would have to take the lead.
“Climate change is an important issue, but not principally for the Fed,” the chairman said while testifying before the joint economic committee. The committee brings together elected officials from both the chambers of the US congress. Powell was responding to a question from Democratic congresswoman Joyce Beatty, who was the only lawmaker to ask about climate change.
”We are not going to be the ones to decide society’s response to [climate change],” Powell said. “That’s going to be elected legislators, not us.”
While the Fed has recently increased its recognition of the impact of climate change on the financial system in public, it is notably later to do so than some of its foreign counterparts. Nonetheless, recent senior Fed official speeches and the central bank’s first climate change research conference at the San Francisco Fed provide a signal the Fed is starting to become more engaged in the issue.
“We are doing a lot of research in this area to think ahead from a risk-management perspective,” Powell said.
Powell said that the Fed is already incorporating climate-related requirements on financial market utilities into its supervision.
“We require financial institutions and financial market utilities, the large utilities that are so fundamental to the financial system, to be resilient against all kinds of things, including severe weather,” he said.
Despite the Fed’s efforts to ramp up its climate change research, it remains a notable absentee from the Network for Greening the Financial System. The group now has 48 central banks and financial regulators as its members, as well as 10 observer institutions. The Fed’s counterparts in the UK, Europe, China and Japan are all NGFS members.
Powell did not say the Fed had any intention to join the NGFS during his testimony. Officials from other central banks working with the NGFS have told Central Banking that they understand the Fed faces strong political pressure not to join the network.
Powell’s testimony follows comments by some other senior Fed officials on the importance of climate change risk. In remarks at the San Fran Fed conference, governor Lael Brainard said while the Fed’s research is still at “an early stage”, it is important it recognises how climate change will impact its policy.
She highlighted the impact climate change might have on long-run neutral rates. Pointing to a 2018 Richmond Fed paper, she said, as the frequency of heat wave increases, output and labour productivity could be negatively impacted.
Kevin Stiroh, the head of supervision at the New York Fed, also recently made a speech on how climate change risks call on supervisors to revisit their tools and data sets to better account of the changing risk profiles of banks. “The US economy has experienced more than $500 billion in direct losses over the last five years due to climate and weather-related events,” Stiroh said in a speech on November 7.