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[webfact]

A 'green interest rate?' Fed digs into climate change economics

By Ann Saphir and Lindsay Dunsmuir

 

FILE PHOTO: A firefighting helicopter makes a water drop on the Getty Fire as it burns in the hills of West Los Angeles, California, U.S. October 28, 2019. REUTERS/Gene Blevins/File Photo

 

SAN FRANCISCO/NEW YORK (Reuters) - In their deliberations on monetary policy, Federal Reserve policymakers need to consider many factors, but up to now, climate change has not been one of them.

 

But as worries about the warming planet increase, the U.S. central bank is taking a closer look at the economic impacts of higher temperatures, more frequent severe weather, and rising sea levels.

 

A "green interest rate" is one of the ideas on view Friday as the San Francisco Fed convenes the U.S. central bank's first-ever conference on climate change and economics. The event is so oversubscribed a webcast has been created to meet demand.

 

While the Fed lags central banking peers such as the Bank of England in making climate change an explicit part of its financial stability remit, the conference is the latest sign the Fed has started to take the risks and costs of global warming seriously.

 

"It's important for us from a monetary policy perspective to know what the potential growth rate of the economy is and if climate events or climate risk is going to shave that off, even if it's over the long term," San Francisco Fed chief Mary Daly said in New York earlier this week.

 

Papers to be presented at this week's conference provide that perspective in a range of ways. One estimates climate change could subtract 7% from real world per capita GDP by 2100; another finds that subsidies for green energy like wind and solar are not an effective tool against global warming, but carbon taxes, if implemented in many parts of the world, would be. Others papers map out how climate change affects asset prices and show trade policy subsidizes greenhouse gas emissions.

 

The U.S. central bank is focusing more intently on global warming, even as President Donald Trump's administration denies it exists. Trump, who has called climate change a "hoax," on Monday officially notified the United Nations that the United States will in 12 months leave the Paris Climate Accord, under which 195 nations agreed to reduce greenhouse gas emissions in a bid to prevent catastrophic planetary warming.

 

Scientists are in broad agreement that carbon dioxide from cars, power plants and other human sources are behind the climate change that's already making powerful hurricanes, severe drought, and other weather extremes more frequent.

 

Already the target of Trump's ire for not lowering interest rates even more than he already has, Fed Chair Jerome Powell said recently that central banks are working out how directly they should confront climate change.

 

"We are not in a place where I think we would conduct monetary policy in order to deal with climate change type issues," Powell said last month in Denver, "but there's a lot of forward-thinking analysis going on."

 

Powell won't be at Friday's conference, but Lael Brainard, one of five Fed governors who sets U.S. interest rates along with the Fed's 12 regional bank presidents, will be.

 

She is no stranger to the ideas presented at Friday's conference: more than a decade ago she helped edit a book about the economic threat of climate change. But since her appointment by President Barack Obama in 2014, she has said little about the issue.

 

CAN INTEREST RATES BE GREEN?

For some economists, it makes sense for the Fed to consider how climate change might affect growth in the same way it would look at other, potentially longer-term issues such as demographic trends.

 

At the conference, Carnegie Mellon University professor Nicholas Muller will outline a "green interest rate." Simply put, he suggests interest-rate setting should take into account the economic drag that greenhouse gas emissions are projected to cause.

 

"Rates should be lower when pollution damages are rising," Muller said in an interview. His paper also shows how judicious use of rate policy can skew investment in ways that could aid environmental goals and save human lives.

 

While that idea may be a step too far for the foreseeable future, the Fed has in the past year produced an extraordinary amount of research on climate change and economics.

 

The Dallas Fed devoted much of a recent quarterly publication to climate change, including an analysis of carbon emissions in the state of Texas.

 

The Richmond Fed last month addressed the question of central banks and climate change in its own quarterly publication. The San Francisco Fed two weeks ago published a 168-page report on the impact of severe weather on poor communities and floated a range of responses, including discouraging banks from lending to rebuild in disaster-hit areas that fail to take steps to reduce future risk.

 

Even so, the Fed is still far behind other major central banks, and some of the research to be presented at the upcoming conference suggests why that could be problematic.

 

"While economists are still debating whether global warming affects the level or the growth rate of the economy, ignoring these effects could potentially lead central banks to misjudge the evolution of the output gap and inflationary pressure," Bank of England researcher Sandra Batten notes in her presentation.

 

Nigel Purvis, co-founder of the advocacy group Climate Advisers, who worked with Brainard to edit "Climate Change and Global Poverty" and won't be at the conference, is more blunt.

 

"Climate change creates material risks for U.S. financial institutions and by extension the entire U.S. economy," Purvis said in an email. "Other financial regulators, including the Bank of England, are climate proofing their financial sectors by requiring climate disclosures and more active management of climate risks.  The Fed should do the same."

 

(Reporting by Ann Saphir and Lindsay Dunsmuir; Additional reporting by Jonnelle Marte in New York; Editing by Andrea Ricci)

 

-- © Copyright Reuters 2019-11-08

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[Krataiboy]

This is the kind of cr-p that happens when a your economy is run private bank which puts its own interests before those of the electorate.

[Tug]

Good to see forward thinking smart people looking at this in spite of the current leadership 

[timendres]

The Fed has no business dealing with anything other than it's mandate - to maximize employment and preserve the value of the US dollar. They have failed miserably on the latter, and have a dubious record on the former. So why in the world would they think they can help with anything beyond their mandate?

[racket]

End The Fed. 

[Bluespunk]

Excellent news. 

[ThaiVisa69]

20 hours ago, Krataiboy said:

This is the kind of cr-p that happens when a your economy is run private bank which puts its own interests before those of the electorate.

Ok boomer

[bristolboy]

16 hours ago, timendres said:

The Fed has no business dealing with anything other than it's mandate - to maximize employment and preserve the value of the US dollar. They have failed miserably on the latter, and have a dubious record on the former. So why in the world would they think they can help with anything beyond their mandate?

"and preserve the value of the US dollar."

Wrong:

'Since 1977, the Federal Reserve has operated under a mandate from Congress to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates" — what is now commonly referred to as the Fed's "dual mandate."'

https://www.richmondfed.org/publications/research/economic_brief/2011/eb_11-12

[Crazy Alex]

Stupid idea from stupid people. The free market is obviously smarter than climate change cultists.

[Chomper Higgot]

4 minutes ago, Crazy Alex said:

Stupid idea from stupid people. The free market is obviously smarter than climate change cultists.

Says free market cultist.

 

The world is always in flux, the idea that ‘the free market’ is the perfect economic model is predicated on the idea that while everything else changes economics don’t.

 

 

[Crazy Alex]

5 hours ago, Chomper Higgot said:

Says free market cultist.

 

The world is always in flux, the idea that ‘the free market’ is the perfect economic model is predicated on the idea that while everything else changes economics don’t.

 

 

Yes, I am proud to be a free market cultist. You are free to think politicians on the take know best.

[neeray]

9 hours ago, Crazy Alex said:

Stupid idea from stupid people. The free market is obviously smarter than climate change cultists.

The "free market" is only interested in today's profits. They concern themselves very little about what climate change will do to profits a decade, two or three in the future.

[FarFlungFalang]

16 minutes ago, neeray said:

The "free market" is only interested in today's profits. They concern themselves very little about what climate change will do to profits a decade, two or three in the future.

Maybe todays profits are threatened and the free market is getting nervous.

[Tayaout]

No carbon tax needed if they reduced military by 50%.

[FarFlungFalang]

1 hour ago, neeray said:

The "free market" is only interested in today's profits. They concern themselves very little about what climate change will do to profits a decade, two or three in the future.

I define the "free market" as my and anybody else's ability to freely spend my money where I choose if I go to the market and find a seller of a particularly delicious chicken with a garlic sauce applied I soon find that to compete the other sellers have adopted this particularly delicious sauce in order to remain competitive,the same applies to things like the clean green friendly products.Regardless of wether market operators believe or not the arguments of for or against if the buyers decide to spend their hard earned on clean green products the old market for the dirty polluting products will hopefully die a timely death.So your comment precisely hits the nail on the head and the article seems to suggest that the movement has begun.   

[zydeco]

On 11/8/2019 at 12:57 PM, webfact said:

At the conference, Carnegie Mellon University professor Nicholas Muller will outline a "green interest rate." Simply put, he suggests interest-rate setting should take into account the economic drag that greenhouse gas emissions are projected to cause.

 

"Rates should be lower when pollution damages are rising," Muller said in an interview. His paper also shows how judicious use of rate policy can skew investment in ways that could aid environmental goals and save human lives.

 

And there you have it. Another excuse for negative interest rates and more QE. Or more "Not QE" QE as the Fed now calls it.  But . . . just thinking.  If industrial activity causes pollution and more greenhoue emissions, then shouldn't interest rates actually go higher to discourage economic activity and pollution????  Funny how everything these days is always an excuse for negative interest rates and more QE, even when it should be the opposite.

[zydeco]

On 11/9/2019 at 12:28 AM, timendres said:

The Fed has no business dealing with anything other than it's mandate - to maximize employment and preserve the value of the US dollar. They have failed miserably on the latter, and have a dubious record on the former. So why in the world would they think they can help with anything beyond their mandate?

Because they have actually abandoned the former two mandates. Now, their only mandate is to support the stock market bubble.

[zydeco]

19 hours ago, bristolboy said:

"and preserve the value of the US dollar."

Wrong:

'Since 1977, the Federal Reserve has operated under a mandate from Congress to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates" — what is now commonly referred to as the Fed's "dual mandate."'

https://www.richmondfed.org/publications/research/economic_brief/2011/eb_11-12

Two words: hedonic adjustment.  

[Crazy Alex]

14 hours ago, neeray said:

The "free market" is only interested in today's profits. They concern themselves very little about what climate change will do to profits a decade, two or three in the future.

Yes of course and the people who have accumulated $22 trillion debt are really looking out for our future.

[Cryingdick]

9 hours ago, zydeco said:

And there you have it. Another excuse for negative interest rates and more QE. Or more "Not QE" QE as the Fed now calls it.  But . . . just thinking.  If industrial activity causes pollution and more greenhoue emissions, then shouldn't interest rates actually go higher to discourage economic activity and pollution????  Funny how everything these days is always an excuse for negative interest rates and more QE, even when it should be the opposite.

 

This makes a lot of sense to me. The more I pollute the cheaper money gets. Perhaps the fed should just stay out of it, they do a bad enough job as it is.

[Cryingdick]

9 hours ago, zydeco said:

Because they have actually abandoned the former two mandates. Now, their only mandate is to support the stock market bubble.

 

If that's the case they did a very bad job of it this time last year. I have my grudges with the fed but the market is doing okay in spite of them not because of them. There is an unprecedented amount of money on the side waiting to work. I also feel like and it is just a guess... that all the cheap or free online brokers are making more people buy in. 

 

There is simply nowhere else to park money right now. You would have to be self loathing to put money in a German bank right now and pay them to do so. 2% yields in the USA, pretty average stocks can get you 2% dividend yields with not much looking around. The market is hot because it's the only game in town right now.

Edited November 10, 2019 by Cryingdick

[timendres]

On 11/9/2019 at 5:07 PM, bristolboy said:

"and preserve the value of the US dollar."

Wrong:

'Since 1977, the Federal Reserve has operated under a mandate from Congress to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates" — what is now commonly referred to as the Fed's "dual mandate."'

https://www.richmondfed.org/publications/research/economic_brief/2011/eb_11-12

 

I stand corrected, and thank you for the link. I would think that "stable prices" and "preserve the value of the dollar" are for most intents the same thing. However, inflation at 2% pa clearly makes them not the same over a very long period of time. Given the many modern alternatives for preserving wealth, I suppose the "stable prices" mandate does make more sense.

[Krataiboy]

23 hours ago, zydeco said:

Because they have actually abandoned the former two mandates. Now, their only mandate is to support the stock market bubble.

And when it bursts, as it is going to do any time soon, guess who will be the winners and losers - why, the Fed's banker chums of course, able to pick up juicy discarded assets for cents on the dollar. 

 

Whatever it's official mandate, the track record of this benighted behemoth is hardly one to boast about, with US debt is at an all time high and the middle class heading for extinction as the gap between the obscenely wealthy and everyone else continues to grow. 

 

With friends like the Fed, who needs enemies?

Edited November 11, 2019 by Krataiboy