The Federal Reserve’s Approach to Climate Is a Stain on Its Independence
By Elyse Schupak
Since the beginning of the second Trump administration, the Federal Reserve has abruptly changed course on its approach to measuring and mitigating climate-related financial risk, abdicating its oft-claimed independence and instead falling in line with the Trump administration’s climate change denial.
The Federal Reserve quietly dissolved four climate-related committees to support the Fed’s understanding of climate risk faced by the financial system and the banks it supervises, Bloomberg reported last week. The dissolution of these committees is one of many actions taken by the Federal Reserve since the start of the year that diminishes its capacity to address the risks climate change poses to the economy and financial system.
The Federal Reserve’s backtracking on climate-related initiatives undermines its political independence—revealing that the Fed considers climate change not in proportion to the impacts it will have on the economy, financial system, and banks under its supervision, but instead is swayed by political pressure and the sustained campaign from the right to ignore the scientific consensus on climate change and its impacts.
Earlier this month U.S. regulators, including the Federal Reserve, led an unsuccessful effort to limit the attention the Basel Committee on Banking Supervision, the international standard setter on bank regulation, will pay to climate risk by proposing a dissolution of the Committee’s climate task force. Three days before President Trump’s inauguration, the Federal Reserve withdrew from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), the organization, spanning more than 90 countries, created to facilitate information sharing and best practices for mitigating climate-related financial risks. Regional banks in the Federal Reserve System have also caved to pressure from the Trump administration, pulling back on climate-related economic research since President Trump took office.
Research from the University of California, Berkeley and University College London confirms what Federal Reserve officials are quick to deny—on issues related to climate change, central bankers are not apolitical actors. This study of G20 central banks, including the Federal Reserve, found that central bank climate risk management is not associated with a country’s economic exposure to transition risks, but instead with its climate politics.
While leading the charge to roll back climate-related initiatives, Federal Reserve Chair Jerome Powell is nevertheless attuned to the risks climate change poses to the economy and financial system. Chair Powell has affirmed the Financial Stability Oversight Council’s conclusion that climate change presents an emerging threat to financial stability. In Congressional testimony in March 2024, Powell cited soaring home insurance costs as a contributing factor to sustained above target inflation. In February, Powell testified that climate change will be to blame for “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.”
The Federal Reserve cannot wait for political conditions to change in order to address the risks climate change is posing to the financial system now. Rising insurance costs and the retreat of private insurers due to climate disasters are putting homeowners, renters, and financial institutions at risk. The cost burden of rising property insurance premiums is driving up household debt and mortgage delinquencies. Mortgage lenders, government sponsored enterprises, and investors are exposed to climate-risky assets moving through the financial system.
A misguided view by some inside and outside the Federal Reserve is that if the Fed acquiesces to President Trump on climate issues—and other goals of the Trump administration such as eliminating DEI policies—the Trump administration will leave the Fed to conduct its core monetary policy mandate free from political interference. It is likely this approach is a political miscalculation, but moreover it reflects a false view that climate change impacts can be partitioned from monetary policymaking.
In reality, the impacts of climate change on the economy will make it more difficult for the Federal Reserve to achieve its monetary policy mandate of stable prices and maximum employment. Climate change impacts such as infrastructure damage, disrupted transit routes, and reduced agricultural output will drive up inflation across the economy, resulting in real impacts on American families and businesses. Climate disasters and chronic impacts of climate change such as extreme heat are already suppressing productivity. As these conditions worsen, the loss of productivity and drag on economic growth will grow more severe.
At present, the Federal Reserve’s monetary policy toolkit is limited in its ability to address these impacts. The Fed’s existing tools cannot repair factories and transit lines damaged by extreme weather, lower temperatures so workers can do their jobs safely, or increase crop yields. Instead, the accommodative monetary policy needed to encourage investments in adaptation and resilience, rebuild infrastructure, and make technological advancements in agriculture would likely also accelerate inflation.
The Federal Reserve must grapple with these challenges now by expanding climate-related research, climate risk mitigation efforts, and international cooperation. Abandoning climate-related initiatives to appease the Trump administration is a short-sighted mistake that compromises the Federal Reserve’s apolitical role and its efficacy in addressing climate-related impacts. The loss of credibility the Federal Reserve will sustain from failing to mitigate the growing impacts of climate change on the economy and financial system will be far greater than the cost of a political fight with the Trump administration now. After these irresponsible decisions, the Fed cannot claim to be above the fray of partisan politics and its reputation as an apolitical institution will be challenging to rebuild.