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Fed Cannot Ignore What Climate Change Is Doing to Economy

Fed officials increasingly believe climate-change issues are factors the U.S. central bank must consider when weighing the outlook for the economy and watching over banks.

“Climate change is an economic issue we can’t afford to ignore,” Federal Reserve Bank of San Francisco President Mary Daly said in a speech Friday at the start of a conference at her bank about the issue, in a first-ever event for the central bank.

“Early research suggests that increased warming has already started to reduce average output growth in the United States. And future growth may be curtailed even further as temperatures rise,” Ms. Daly said. “There’s little doubt that we need to recognize, examine, and prepare for these risks in order to fulfill our core responsibilities,” she said.

Atlanta Fed leader Raphael Bostic, who spoke with reporters Thursday evening, agreed that addressing climate-change issues is a core responsibility for the central bank now.

The Fed is legally charged with promoting stable prices and maximum sustainable job growth. It is also a key regulator of banks. For some observers, that suggests that the central bank has no real role to play in dealing with the effects of a warming environment that has and is predicted to produce more severe weather events.

But this year, central bankers have started to push back against that. Fed Chairman Jerome Powell has acknowledged that the Fed is working to make sure banks it regulates are ready to withstand the impact of severe weather events driven by climate change.

The costs to the economy and financial system are real already. On Thursday, a top bank regulator at the New York Fed said the U.S. has already faced more than a half trillion dollars in losses to climate and weather events.

Fed researchers are also beginning to tally what the economy will lose if nothing is done to arrest what scientists believe will be the path of overall global temperature increases, and the outlook is troublesome.

On Friday, Fed governor Lael Brainard, who was to speak at the San Francisco Fed conference, explained how climate change could alter the long-term path of the economy, affecting monetary policy in the process.

“As policies are implemented to mitigate climate change, they will affect prices, productivity, employment and output in ways that could have implications for monetary policy,” Ms. Brainard said. “The large amount of uncertainty regarding climate-related events and policies could hold back investment and economic activity,” the official said.

“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,” Ms. Brainard said.

One of the papers to be presented at the San Francisco Fed conference said a “persistent increase in average global temperatures by 0.04 degrees centigrade “reduces world real GDP per capita by more than 7% by 2100.” But if countries were to abide by the commitments of the Paris Climate Agreement and limited temperature increases to 0.01 centigrade a year, lost output is much less at 1% over the same period.

The Trump administration has just taken steps to formally withdraw the U.S. from the Paris Agreement.

The San Francisco, Atlanta, Dallas Fed districts have extensive ocean exposures, and the San Francisco Fed district has seen wave after wave of fire disruptions.

“My district has the entire Gulf Coast except for Texas. I have coastline from the [Florida] Keys up to South Carolina. That’s a lot of coast,” Mr. Bostic said. “That’s a lot of exposure. And we’ve already seen the effects of climate adaptation, in terms of lost coast line, in terms of raised water levels,” he said.

Ms. Daly and Mr. Bostic said this situation goes to all aspects of what the Fed does. In her remarks, Ms. Daly said that at a core level, climate disruptions affect the Fed’s ability to supply the economy with cash, which is critical when power has been cut off. Banks need to be prepared to deal with risk too because unexpected events expose them to big losses, which could have implications for overall financial stability.

Mr. Bostic said the situation is urgent. “If we are not ready for this, you know, there are some cliff edges that you’re going to come to, and some pretty important economies could be damaged pretty significantly.”
Source: Dow Jones

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