Fed Chair Powell is ignoring the greatest threat to our economy: climate risk

The latest U.S. National Climate Assessment states that climate-fueled extreme weather disasters cost the nation a staggering $150 billion every year. This disproportionately affects underserved and overburdened communities.

The assessment makes clear that economic disruptions and the financial risks associated with them will continue to get significantly worse, absent a major shift toward investments in clean energy and climate resilience, as well as a rapid phase-out of fossil fuels. 

Educators like myself across the country are grappling with how best to engage with students on the worsening climate risks. From wildfires and wildfire smoke, to flooding, extreme heat, and more frequent intense storms, nearly every community is now experiencing climate disruptions. This new reality means that educators have to integrate discussion of climate risks into their teaching. 

Yet some of the country’s most powerful leaders, including the Federal Reserve Bank Chair Jerome Powell, who held an “economic education” teacher town hall, refuse to acknowledge climate risks.

Over 120 teachers and professors from across the U.S., including myself, submitted a letter asking Powell how the Fed is addressing climate-related financial risks. Given that there is no bigger threat to the stability of our economy than climate change, we hoped he would address our concerns. 

But no such luck. We were disappointed that he failed even to acknowledge climate financial risks. Our questions were ignored. By failing even to mention climate, Powell is perpetuating an irresponsible and arrogant perspective completely disconnected from the realities facing students and educators.

The Treasury Department recently underscored how climate change will continue to affect future economic potential across the economy in multiple ways. “Temperature increases,” the department’s press release states, “have been found to cause declines in students’ academic performance and future incomes, as well as diminish worker productivity, reducing economic potential across the economy.” 

These impacts are having a disproportionate influence on marginalized and already vulnerable communities and households. 

As one of the world’s most influential central banks, the Fed’s failure to take action to mitigate climate financial risks is moving our country and the world to an increasingly dangerous and destabilizing future. Despite its recent introduction of pilot climate scenario analysis and the release of the long awaited principles for managing climate-related risk, the Fed continues to incentivize investments in fossil fuels.

Its actions still fall well short of what is needed to reduce the destabilizing effects of climate change. It took two years for the Fed to finalize the climate guidance, which, similar to the scenario analysis exercise, does not have any real regulatory outcomes that would curb banks’ investments in risky fossil fuels. 

It is as if Powell believes that by ignoring climate change — an issue that threatens the very stability that he is responsible for maintaining — that this destabilizing force will somehow go away. The record-setting number of climate change-fueled extreme weather events this year alone (25) proves otherwise. As educators and students grapple with the disruptive effects of the climate crisis, the science is clear that our reliance on fossil fuels is the biggest contributor to the increased frequency and intensity of extreme weather events.

With support and incentives from the Federal Reserve, major Wall Street banks remain the largest funders of fossil fuels globally. These banks are gambling with our future, and putting themselves and our economy at risk from the very crisis they are fueling. The Fed’s refusal to regulate banks’ fossil fuel financing is an intentional policy choice. Instead of acting for the public good, Powell and the Fed are prioritizing the short-term corporate interests of financial elites by protecting the banks who are profiting by destabilizing everyone else’s financial future. 

One of the Fed’s central mandates is to promote the stability of the financial system and manage systemic risks. Climate change and the continued financing of fossil fuels are systemic risks that continue to grow rapidly, especially as insurance companies limit coverage or withdraw entirely from climate-vulnerable areas, leaving homes, businesses and ultimately financial institutions exposed. The Fed has a duty to act and a suite of tools it could use to mitigate climate related financial risks right now, including mandating transition planning that would require banks to phase out fossil fuel financing on a timeline consistent with climate science.  

Compared to its global counterparts, the Fed is falling far behind and appears to be completely out of touch with the huge financial risks of climate change. The European Central Bank, for example, is set to give EU banking supervisors new powers to assess banks’ climate transition plans. This will allow Europe’s central bank to make banks set aside capital to absorb losses if they are unprepared for the climate transition.

At a recent International Energy Agency event, European Central Bank President Christine Lagarde said that the solution to climate change “is not to dilute our ambition. It is not to detract our focus from the goal of net-zero. And it is not to delay the time for action. The answer is to follow through with the transition by understanding the challenges it entails and ensuring that the costs are shared fairly.”

Unlike Powell, Lagarde seems to understand that climate change demands action because it threatens central banks’ core mandates to maintain price stability, keep inflation low, and manage systemic risks.

The question remains: why isn’t the Fed leveraging its power to promote a more stable future and taking steps to protect students, teachers and the U.S. financial system from climate related risks? That’s why we came together as educators to ask Powell exactly that in a public forum. Instead of responding to our questions, he ignored this issue. We are still waiting for a response.

Jennie C. Stephens is professor of Sustainability Science and Policy at Northeastern University in Boston, Mass.