December 27, 2020

The Fed Warms To Climate Change

The Fed Warms To Climate Change

The politicization of the Federal Reserve continues apace. And no, President Trump isn’t trying to pull some grand last-minute gesture before he leaves office, like trying to fire Jerome Powell or something like that.

Last week, as expected, the Federal Reserve formally joined the Network of Central Banks and Supervisors for Greening the Financial System, the “lone holdout” among the world’s major central banks to join this “forum for central bankers and regulators to come together and discuss how their institutions can ensure their financial systems don’t worsen climate change risks, and how financial institutions might be able to lower those risks,” as the Wall Street Journal described it.

As innocuous as that may sound, it injects the Fed solidly in the middle of what has become increasingly political, namely which companies – and probably, individuals eventually– banks should or shouldn’t lend money or offer their services to.

As we know, several large international banks have been under increasing pressure from shareholder activists to stop making loans to companies in the “fossil fuels” business, namely oil and coal companies and pipeline operators, and the like. And the banks have dutifully buckled under, albeit with a long lead time as to when they will actually cease doing so. Now the Fed will be providing added pressure on the banks to make loans only to those companies favored by the Washington and New York elites – or at least will feel added pressure to do so.

As the Journal noted, “The Senate Democrats’ Special Committee on the Climate Crisis recently issued a report detailing how the Fed and eight other regulatory agencies should penalize investment in fossil fuels and promote green energy. They claim financial institutions are underpricing the risk that carbon-intensive assets will become ‘stranded.’”
But it’s not just the banks’ lending policies that are the target, but the Fed’s as well.

The Fed Warms To Climate Change

“For some months, Fed emergency support activities related to the coronavirus pandemic have led to the central bank buying the bonds of fossil fuel companies,” the New York Times notes. “Some activists and academics have accused the Fed of giving a lifeline to an industry that is increasing climate risk at the same time officials are trying to reduce those risks.”

The Democrats also want the Fed to “account for [climate] risks in monetary policy, … to buffer the economy from unexpected shocks and achieve maximum employment and price stability,” the Journal notes.

The debate isn’t all one-sided. “The Fed is also starting to face pressure in the other direction, from Republicans who are worried that regulatory changes aimed at making banks reduce their exposure to climate risks could hurt the economy and reduce credit availability,” the Times added. “Fossil fuel finance is a major flashpoint for those on both sides of the issue.”

Although you can bet the Fed will come down on the side of the angels, as Powell himself hinted at last week at his press conference following the Fed’s monetary policy meeting, its last of the year.

Powell prefaced his remarks with the obligatory disclaimer that the Fed is a “nonpolitical agency,” but then went on to say, according to American Banker: “Climate change is an emerging risk to financial institutions, the financial system, and the economy, and we are, like so many others are, in the very early stages of understanding what that means, what needs to be done about it and by whom,” Powell said. “Climate change is relevant to our existing mandates under the law.”

In other words, if the Fed decides it’s not political, then it’s not.

Of course, this won’t be the last polarizing issue that the Fed will find itself taking a stand on going forward.

Let’s not forget that when Joe Biden was running for president, he endorsed a proposal to add a third mandate to the Fed’s current directives of price stability and full employment – that of monitoring “racial equity” throughout the economy. “The Federal Reserve should significantly elevate racial equity as part of its mandate by targeting not just the overall unemployment rate but disparate unemployment rate based on race,” according to the “unity task force” set up by Biden and former presidential candidate Bernie Sanders. “To do so, language in the Federal Reserve Act should be amended to require the Fed chair, in his or her semiannual report, to report not just on macroeconomic conditions, but on the extent of racial employment and wage gaps, and what the central bank is doing to reduce them.”

That was quickly followed up by a Democrat-sponsored bill in Congress to make that the law. The Federal Reserve Racial and Economic Equity Act would require the Fed to take action “to minimize and eliminate racial disparities in employment, wages, wealth, and access to affordable credit.”

So, if you think politicizing the Fed is going to go away when President Trump leaves office, dream on. To paraphrase the Al Pacino character in “Scent of a Woman,” “We’re just getting warmed up.”

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George Yacik
INO.com Contributor – Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.