NEW YORK (Reuters Breakingviews) - Where climate change is concerned, it seems the scales have finally fallen from the eyes of America’s rate-setters. The Federal Reserve on Monday for the first time included climate change as one of the risks to the financial system in a biannual stability report. The Damascene moment is late. But it sets the scene for more concrete action, especially now that the politics looks more favorable.
The Fed is hardly a pushover when it comes to regulating banks. Yet Chair Jay Powell has been timid on climate change, declining to say that it merits specific changes to the way banks are overseen. The Fed has also hung back from joining the Network for Greening the Financial System, a group that includes most of the planet’s big central banks.
Granted, climate change has made it onto the Fed’s agenda in other ways. Lael Brainard, an openly progressive Fed governor, spoke out last November on the topic, and the San Francisco regional Fed hosted a summit around the same time. A month earlier, minutes of a Fed’s monetary policy committee meeting showed that “a couple of participants” had suggested stability oversight should encompass climate-related risk.
So why the foot-dragging? Maybe because climate is a political concept in the United States, cast as a left-wing issue by a right-wing Senate and President Donald Trump. Technically the Fed is independent, but it’s hard to deny that the election of Democrat Joe Biden makes the environment a little more comfortable for agencies that want to address climate risk directly.
For now, the United States remains behind on a number of fronts. France and Britain already plan to run climate-related stress tests on their banks, and other European countries and Japan are likely to follow suit. With such a colossal financial system to oversee, the Fed can’t afford to experiment. Then again, its banks are highly exposed – both to adverse weather and to the decline of carbon-intensive industries like oil.
One consolation is that being late has its own advantages. The Fed can watch how early examples of stress tests pan out in other countries, and the assumptions that its peers use. And at least, whatever shifts a Biden administration heralds for U.S. climate policy or the staffing of the Fed itself, the central bank has shown it’s on the right road.
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