From Wildfires to Wall Street, Powell’s Retreat on Climate Change Puts Economy at Risk
By Elyse Schupak
Last week, Federal Reserve Chair Jerome Powell appeared before Congress for his first set of oversight hearings since the start of the Trump administration. On the Federal Reserve’s role addressing climate-related financial risks—the risks climate change poses to the financial system and economy—Powell had much to defend. Then again, he always has.
Three days before President Trump’s inauguration, the Federal Reserve Board announced it had withdrawn from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), the organization of central banks and supervisors, spanning more than 90 countries, created to facilitate information sharing and best practices for mitigating climate-related financial risks.
Since the start of the Trump administration, regional Fed banks have pulled back on climate-related economic research, according to the New York Times. The New York Fed recently dropped out of cosponsoring a conference addressing the economic and financial stability impacts of climate migration, natural disasters, and other climate change related topics and the San Francisco Fed has halted its annual seminar on climate economics.
The Federal Reserve’s participation in NGFS and ability to conduct research on climate impacts to the economy should not be influenced by politics. The Federal Reserve is not a part of the Trump administration; it is an independent agency outside of the executive branch. But the Trump administration’s climate change denial has clearly had a chilling effect on Federal Reserve activities.
Chair Powell’s reluctance to address climate-related risks to the economy and financial system is not new. During the Biden administration, Powell attempted to occupy a false middle ground between the anti-ESG crusade of the GOP and a Democratic party unwilling to prioritize the issue to the same degree. President Trump’s election, and his attempts to consolidate power in his first weeks in office, have further tipped the scale towards Federal Reserve inaction on climate risk.
Chair Powell’s further retreat on issues related to climate change comes as climate risks to the U.S. economy and financial system have never been greater. The recent wildfires in California devastated Los Angeles communities and produced economic losses that could top $250 billion. Hurricane Helene wreaked havoc on parts of North Carolina previously considered climate safe havens, and less than half of the nearly $50 billion in losses from the hurricane were insured.
These losses are straining insurers in both states. Following the California fires, State Farm, the largest homeowners’ insurance company in California, asked state regulators to approve a 22 percent average rate increase, on top of the already high and growing cost of insuring against disasters. California’s FAIR plan, the state’s property insurer of last resort, has been approved to assess private insurers and California taxpayers for the additional $1 billion it needs to meet its post-fire liabilities—the largest assessment in the FAIR plan’s history.
Rising insurance costs and the retreat of private insurers due to climate disasters send a ripple of instability throughout the financial system. Uninsured and underinsured homeowners are financially vulnerable to climate events, as are banks, mortgage lenders, Government Sponsored Enterprises (GSEs), and investors who hold mortgage assets. The cost burden of rising property insurance premiums drives up household indebtedness and mortgage delinquencies. Erosion in insurance and mortgage markets, as well as climate disasters themselves, threaten the viability of municipal budgets and local economies. Increased expenditures, reduced tax revenue, and higher cost of capital can create a financial doom loop for climate-vulnerable municipalities.
Chair Powell is not ignorant of these risks. During Tuesday’s Senate hearing he stated. “If you fast forward 10 or 15 years, there will be regions of the country where you can’t get a mortgage, there won’t be ATMs, banks won’t have branches and things like that.” Powell continued, “It’s not that the banks will stay there and keep making loans in the face of evidence of disasters, or that insurance companies will write policies.”
When Chair Powell is willing to acknowledge the financial stability impacts of climate change, it is only to consider how climate risks could directly impair assets held by banks under the Federal Reserve’s supervision. Powell assumes that if these banks can get climate-risky assets off their balance sheets before they go bad, while also halting an extension of mortgage credit to climate-vulnerable communities, these lenders will be safe and the Federal Reserve’s job will be done.
But this approach is flawed. In Chair Powell’s predicted future—where climate-vulnerable areas of the country are uninsurable and unmortgageable—residents and businesses will leave, tax revenue will decline, municipalities will struggle to make bond payments, government services will be strained, local economies will suffer, and communities will be hollowed out. These effects will filter up to the economic aggregates the Federal Reserve targets and will have implications for monetary policy decisions. Institutions connected to Federal Reserve-supervised banks, including insurers, GSEs, and investment funds, will face material distress that could also heighten instability. Climate driven financial and economic instability will increase risks for the financial institutions the Federal Reserve supervises, whether or not these institutions hold climate risky mortgages on their balance sheets.
President Trump has no plans to address climate risks other than to bully federal agencies and private institutions into ignoring them, but this reckless approach does not preclude Federal Reserve action. The Federal Reserve’s mandate requires it to look squarely at all risks to the economy and financial system, including climate risks, and address them before they have destabilizing effects. This mandate, rather than politics, should guide its approach.