On Jan. 10, Federal Reserve (Fed) Chair Jerome Powell explained that if the U.S. central bank is to maintain its independence, it cannot “and will not be, a climate policymaker.” While California suffers in the wake of unprecedented flooding, estimated to cost over $30 billion in losses, Powell insists “it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy.” This is a narrow, short-sighted interpretation of the Fed’s mandate, and a potentially dangerous and misguided view on what the Fed’s independence means.
The Fed’s independence is intended to ensure independence from political cycles — it does not absolve the Fed of its duties to serve the public interest. All of the Fed’s functions and core responsibilities are deeply intertwined with and impacted by the climate crisis. By feigning independence, the Fed seems to be caving to reportedly false arguments made by financial institutions, the fossil fuel industry and its political allies — actors with strong incentives to thwart the clean energy transition.
Powell’s claim that climate change is too political shows just how out of touch he is with reality. The climate crisis and ecological collapse are seriously undermining the stability of our entire economy and the planet, and that demands a central bank response. As the Deputy Governor of the Banque de France explained, “what would be too political is to deny all the evidence gathered by natural and social scientists for the past decades.” By choosing to wash its hands of the climate crisis, the Fed is in fact making a political decision.
Powell has justified his position in part by claiming the Fed’s actions shouldn’t pick winners and losers. But, in reality, all central bank decisions — even interest rate tinkering — creates winners and losers. Some people and financial institutions benefit while already marginalized and vulnerable communities are worse off. When Wall Street tanked the economy in 2008, the Fed pumped public money into the financial system. Bankers got bailed out, while struggling communities were left to foot the bill. When the Fed used its emergency powers again during the COVID-19 crisis, oil and gas companies emerged as a clear winner as the Fed propped up the already heavily subsidized fossil fuel industry — violating its purported principles of market neutrality. The Fed isn’t just indifferent toward climate and environmental breakdown — the biggest existential threat of all — it is contributing to the problem and worsening instability.
The Fed is charged with maintaining stable prices and maximum employment, objectives it cannot hope to fulfill in a world that lurches from one climate disaster to the next. Extreme weather erodes infrastructure and supply-chains, disrupts agriculture and food production, spurs job loss, as well as lowers worker productivity — clearly the climate crisis is already having a profound impact on inflation and employment.
Powell’s comments seem to be at odds with those made by the Fed’s Vice Chair Lael Brainaird, who recently noted that climate change risks are “heralding a shift to an environment characterized by more volatile inflation.” Brainard seems to understand a simple fact that Powell seems to be missing or simply ignoring — climate change is hurtling us toward an era of intensified price volatility. Powell’s narrow thinking also runs contrary to other central banks around the world, including the European Central Bank, which acknowledges that climate change falls squarely within its primary mandate of maintaining price stability, as well as its secondary mandate of supporting EU economic policies.
It is also the Fed’s responsibility to prevent another financial crisis, which could be triggered by Wall Street’s persistent fossil fuel financing. U.S. banks hold a whopping $681 billion of risky fossil fuel assets on their balance sheets, far surpassing the subprime housing assets that led to the 2008 crash.
With the clean energy transition picking up pace, banks are now at even greater risk of a mass default on loans. Even though Powell appears to recognize a “narrow” role for the Fed in managing climate risks, he is simply failing to grasp the sheer magnitude of the threat we face. The best risk mitigation strategy is for the central bank to use the full extent of its authority to address the climate crisis.
The Fed has multiple tools in its toolbox right now — without requiring new congressional legislation — that could discourage continued fossil fuel lending and encourage 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 and strengthening the Fed’s proposed climate-risk guidance for large banks, to taking bolder action like requiring banks to hold more capital in proportion to climate risk and eventually setting outright limits on fossil fuel lending.
The Fed is not expected to lead the fight against climate change, but it does have a critical role to play. Powell has a choice: he can continue to ignore the Fed’s core duties and leave the economy (and communities) vulnerable to destabilizing chaos, or he can use the Fed’s tools to bolster economic security and resilience. It is simply not possible for the U.S. central bank to remain neutral on climate.
Akiksha Chatterji is a campaigner at the non-profit research and campaign organization Positive Money US. She is currently campaigning to align the Federal Reserve’s monetary and regulatory policies with the goals of the 2015 Paris Agreement.
Jennie C. Stephens is the dean’s professor of sustainability science and policy at Northeastern University’s School of Public Policy and Urban Affairs. She is the author of “Diversifying Power: Why We Need Antiracist, Feminist Leadership on Climate and Energy.”