San Francisco Federal Reserve President Mary Daly said climate change is affecting both employment and prices, which lands the critical topic under the Fed’s policy purview.
Daly, in a speech Tuesday to the Peterson Institute for International Economics and in follow-up questions with members of the media, stressed that costly extreme weather, rising insurance premiums, bank-priced vulnerable assets, and energy-sector job displacement have already reshaped the U.S. economy.
“Our future is uncertain: no one really knows the severity and scale of
climate change, where and who will be most affected, or the nature, extent
and duration of our response to the risks,” she said. “But one thing is certain—the
economic ground is shifting. And we have a window of opportunity to prepare; to choose the degree of hardship we will endure.”
Some, mostly Republican, lawmakers have criticized the Fed’s recent push into exploring climate-change policy. They argue that the topic remains too nuanced for near-term decisions and is beyond the scope of the dual Fed mandates for steering the economy toward full employment and controlling inflation.
These lawmakers have also queried early efforts by the Fed to push banks on “stress testing” climate issues, pointing to longer-term measurement uncertainty and a poor fit for differently sized banks. They’ve also challenged a Securities and Exchange Commission pursuit of climate-risk disclosure from publicly-traded companies.
Read: CEOs want SEC climate reporting separate from earnings but concede new rules are likely
Climate change can affect the savings rate, labor productivity and capital investment, Daly said, potentially pushing down on the long-term neutral rate of interest. That in turn could crimp the Fed’s ability to fight future economic downturns with conventional monetary policy.
“Of course, there could also be offsetting pressure on r-star [neutral rate of interest] from increased investments to move to a more sustainable economy. In other words, there’s a lot of uncertainty,” she said.
Climate-related risks are not playing a major role in the setting of Fed interest-rate policy at the moment, Chairman Jerome Powell said earlier this month.
Daly said she doesn’t consider the Fed’s stepped-up rhetoric and its creation of a new Supervision Climate Committee as the “activism” that is irksome to some lawmakers. “We are not advocating for particular policy… we are listening, learning and studying our goals as Congress gave them to us,” she said.
Daly was pushed in Q&A on whether financial-sector intervention to lever “constructive things” toward slowing climate change can be destabilizing to markets.
There is a major difference between European Central Bank mandates on climate change and those at the U.S. central bank, she said.
“The Fed is not doing this [and] I’m trying to pull that apart” in discussions about the differing approaches, she said. “Transparency matters and telling people what you’re going to do and why you’re doing it… is a mitigator to disruptions.”
Dallas Fed President Robert Kaplan has raised concerns that oil
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companies could face a shortage of capital as they need to upgrade or repair facilities during a transition to renewable energy. These and other “stranded assets and stranded labor” are a challenging medium-term concern worthy of the Fed’s attention, Daly agreed, equating it to the digital revolution of the late 1990s and early 2000s.
“Before, we waited for displacement and then we reacted. I am asking for rethinking of this,” she said.
Read: Fed’s Mester and Daly say taper decision should wait until fall
