Central bank must protect against climate change

Central bank must protect against climate change - us-canada

US Federal Reserve Governor Lael Brainard attends a “Fed Listens” event in the Federal Reserve headquarters in Washington, DC, on October 4, 2019.

Eric Baradat | AFP | Getty Images

Along with all the other things it must consider, the Federal Reserve should take into consideration climate change when formulating monetary policy, Fed Governor Lael Brainard said Friday.

The problem could have impact on determining the correct level of interest rates and trigger systemic financial damage in a way similar to what occurred during the fiscal crisis, the central bank official said during a speech in San Francisco.

“Increasingly, it will be important for the Federal Reserve to take into account the effects of climate change and associated policies in setting monetary policy to achieve our objectives of maximum employment and price stability,” Brainard said in prepared remarks.

One of the factors for the Fed would be if the effect of climate change-related events such as hurricanes, wildfires and floods are temporary or durable. Such assessments might help determine where the Fed views the long-run “neutral” interest rate that’s neither stimulative nor restrictive to increase.

“Just on its own, the large amount of uncertainty regarding climate-related events and policies could hold back investment and economic activity,” Brainard said.

If fallout from climate change intensify, it might lead to asset valuations to be mispriced in ways she compared to property leading to the fiscal crisis.

“For example, if prices of properties do not accurately reflect climate-related risks, a sudden correction could result in losses to financial institutions, which could in turn reduce lending in the economy. The associated declines in wealth could amplify the effects on economic activity, which could have further knock-on effects on financial markets,” Brainard said.

She added that banks will need to be ready against these shifts as a way to recognize the risks.

Brainard’s address didn’t otherwise address where she believes monetary policy ought to be. The Federal Open Market Committee last week approved its third interest rate cut this year, but officials suggested that it probably will be the last for a little while.

Central bank must protect against climate change - us-canada

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