MNI POLICY: SF Fed Says No Tools To Promote Low-Carbon Economy

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve does not have the appropriate tools

to promote a low-carbon economy in the fight against global warming even as the

effects of climate change on the U.S. economy merit study, a San Francisco Fed

paper argued Monday. 

     The Fed can neither fine tune its short-term interest rates to support wind

farms nor can it use its balance sheet to buy low-carbon corporate bonds, the

bank's executive vice president, Glenn Rudebusch, wrote in an Economic Letter.  

     "Such 'green' quantitative easing is an option for some central banks but

not for the Fed, which by law can only purchase government or government agency

debt," he said. "While the effects and risks of climate change are relevant

factors for the Fed to consider, the Fed is not in a position to use monetary

policy actively to foster a transition to a low-carbon economy." 

     Suggestions that the Fed help finance a massive environmental investment

program like the Green New Deal using its balance sheet have met with pushback

from Fed Chair Jay Powell, who has said the Fed's role is not to provide support

for particular policies on environmental or social issues.

     Volatility induced by climate change poses risks to the economy and need to

be studied further, Rudebusch said. 

     Rising temperatures could cause the disruptive effects of weather shocks to

grow in size and frequency. Over the longer term, climate risks could influence

stock prices and the value of other financial assets.

     Climate change could also be a factor in achieving and maintaining low

inflation, he said. 

     "It took a decade or two -- a relevant time scale for climate change -- for

the Fed to achieve its inflation objective after the Great Inflation of the

1970s and the Great Recession," he noted. 

     The full note is online at:

https://www.frbsf.org/economic-research/publications/economic-letter/2019/march/

climate-change-and-federal-reserve/

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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