On Jan. 10, Federal Reserve (Fed)\u00a0Chair\u2002Jerome Powell explained\u00a0that if the U.S.\u00a0central bank is to maintain its independence, it\u00a0cannot \u201cand\u00a0will not be, a\u00a0climate policymaker.\u201d While\u00a0California suffers in the wake of unprecedented flooding, estimated to\u00a0cost over\u00a0$30 billion in losses, Powell insists \u201cit would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy.\u201d This is a narrow, short-sighted interpretation of the Fed\u2019s mandate,\u00a0and\u00a0a potentially dangerous\u00a0and\u00a0misguided view on what the Fed\u2019s independence means.
\nThe Fed\u2019s independence is intended to ensure independence from political\u00a0cycles \u2014 it does not absolve the Fed of its duties to serve the public interest. All of the Fed\u2019s\u00a0functions\u2002and\u2002core responsibilities\u00a0are deeply intertwined with\u00a0and\u00a0impacted by the\u00a0climate\u00a0crisis. By feigning independence, the Fed seems to be\u00a0caving to reportedly\u00a0false arguments\u00a0made by financial institutions, the fossil fuel industry\u00a0and\u00a0its political allies \u2014 actors with strong incentives to thwart the\u00a0clean energy transition.
\nPowell\u2019s\u00a0claim that\u00a0climate\u00a0change is too political shows just how out of touch he is with reality. The\u00a0climate\u00a0crisis\u00a0and\u00a0ecological\u00a0collapse are seriously undermining the stability of our entire economy\u00a0and\u00a0the planet,\u00a0and\u00a0that demands a\u00a0central bank response. As the Deputy Governor of the Banque de France\u00a0explained, \u201cwhat would be too political is to deny all the evidence gathered by natural\u00a0and\u00a0social scientists for the past decades.\u201d By\u00a0choosing to wash its hands of the\u00a0climate\u00a0crisis, the Fed is in fact making a political decision.
\nPowell has justified his position in part by\u00a0claiming the Fed\u2019s actions shouldn\u2019t pick winners\u00a0and\u00a0losers. But, in reality, all\u00a0central bank decisions \u2014 even interest rate tinkering \u2014\u00a0creates winners\u00a0and\u00a0losers. Some people\u00a0and\u00a0financial institutions benefit while already marginalized\u00a0and\u00a0vulnerable\u00a0communities are worse off. When Wall Street tanked the economy in 2008, the Fed\u00a0pumped public money\u2002into the financial system. Bankers got bailed out, while struggling\u00a0communities were left to\u00a0foot the bill. When the Fed used its emergency powers again during the\u00a0COVID-19\u00a0crisis, oil\u00a0and\u00a0gas\u00a0companies emerged as a\u00a0clear winner as the Fed\u00a0propped up\u00a0the already heavily subsidized fossil fuel industry \u2014\u00a0violating\u00a0its purported principles of market neutrality. The Fed isn\u2019t just indifferent toward\u00a0climate\u00a0and\u00a0environmental breakdown \u2014 the biggest existential threat of all \u2014 it is\u00a0contributing to the problem\u00a0and\u00a0worsening instability.
\nThe Fed is\u00a0charged with maintaining stable prices\u00a0and\u00a0maximum employment, objectives it\u00a0cannot hope to fulfill in a world that lurches from one\u00a0climate disaster to the next. Extreme weather erodes infrastructure\u00a0and\u2002supply-chains,\u00a0disrupts agriculture\u2002and\u2002food production,\u00a0spurs job loss,\u00a0as well as\u00a0lowers\u2002worker productivity\u00a0\u2014\u00a0clearly the\u00a0climate\u00a0crisis is already having a\u2002profound impact\u00a0on inflation\u00a0and\u00a0employment.
\nPowell\u2019s\u00a0comments seem to be at odds with those made by the Fed\u2019s Vice\u00a0Chair Lael Brainaird, who\u00a0recently noted\u00a0that\u00a0climate\u00a0change risks are \u201cheralding a shift to an environment\u00a0characterized by more volatile inflation.\u201d Brainard seems to understand a simple fact that Powell seems to be missing or simply ignoring \u2014\u00a0climate\u00a0change is hurtling us toward an era of intensified price volatility. Powell\u2019s narrow thinking also runs\u00a0contrary to other\u2002central banks\u00a0around the world, including the\u00a0European\u2002Central Bank, which acknowledges that\u00a0climate\u00a0change falls squarely within its primary mandate of maintaining price stability, as well as its secondary mandate of supporting EU economic policies.
\nIt is also the Fed\u2019s responsibility to prevent another financial\u00a0crisis, which\u00a0could be triggered by Wall Street\u2019s persistent\u00a0fossil fuel financing. U.S. banks hold a whopping\u00a0$681 billion\u00a0of risky fossil fuel assets on their balance sheets, far surpassing the subprime housing assets that led to the 2008\u00a0crash.
\nWith the\u00a0clean energy transition\u00a0picking up pace, banks are now at even\u00a0greater risk\u2002of a mass default on loans. Even though\u00a0Powell appears to recognize a \u201cnarrow\u201d role for the Fed in managing\u00a0climate risks, he is simply failing to grasp the sheer magnitude of the threat we face. The best risk mitigation strategy is for the\u00a0central bank to use the full extent of its authority to address the\u00a0climate\u00a0crisis.
\nThe Fed has multiple tools in its toolbox right now \u2014 without requiring new\u00a0congressional legislation \u2014 that\u00a0could discourage\u00a0continued fossil fuel lending\u00a0and\u00a0encourage renewable investments to ensure the financial system it supervises is aligned with a pathway to limit global warming to 1.5 degrees Celsius. These tools range from quickly finalizing\u00a0and\u00a0strengthening the Fed\u2019s proposed\u00a0climate-risk guidance\u00a0for large banks, to taking bolder action like requiring banks to hold more\u00a0capital in proportion to\u00a0climate risk\u00a0and\u00a0eventually setting outright limits on fossil fuel lending.
\nThe Fed is not expected to lead the fight against\u00a0climate\u00a0change, but it does have a\u00a0critical role to play. Powell has a\u00a0choice: he\u00a0can\u00a0continue to ignore the Fed\u2019s\u00a0core duties\u00a0and\u00a0leave the economy (and\u00a0communities) vulnerable to destabilizing\u00a0chaos, or he\u00a0can use the Fed\u2019s tools to bolster economic security\u00a0and\u00a0resilience. It is simply not possible for the U.S.\u00a0central bank to remain neutral on\u00a0climate.
\nAkiksha\u00a0Chatterji\u00a0is a\u00a0campaigner at the non-profit research\u00a0and\u00a0campaign organization Positive Money US. She is\u00a0currently\u00a0campaigning to align the Federal Reserve\u2019s monetary\u00a0and\u00a0regulatory policies with the goals of the 2015 Paris Agreement.
\nJennie\u00a0C.\u00a0Stephens is the dean\u2019s professor of sustainability science\u00a0and\u00a0policy at Northeastern University\u2019s School of Public Policy and Urban Affairs. She is the author of \u201cDiversifying Power: Why We Need Antiracist, Feminist Leadership on\u2002Climate\u2002and\u2002Energy.\u201d<\/p>\n