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The Fed's Climate Awakening

The US Federal Reserve, like other central banks, uses monetary policy to achieve price stability and full employment, but struggles to use it effectively when the stability of the financial system is in jeopardy. Fortunately, when it comes to climate financial risks, a new mindset – supported by new personnel – is emerging.

WASHINGTON, DC – On February 3, the Senate Banking Committee will hold confirmation hearings for three nominees to the Federal Reserve Board of Governors: Sarah Bloom Raskin, Lisa Cook, and Philip Jefferson. All three are exceptionally well-qualified, with deep experience and overlapping expertise that includes bank regulation, international economics, and monetary policy. (I worked closely with Cook on these issues within US President Joe Biden’s transition team.)

One issue sure to make headlines is the extent to which the Fed should concern itself with risks posed to the financial system by climate change. Fed Chair Jay Powell has repeatedly said that these risks must be taken seriously. His statements to this effect have not generally attracted controversy or sharp rhetoric from politicians on either side of the aisle. Appointing Raskin, an experienced regulator, as vice chair for supervision is a good way to support Powell on these issues.

Congress created the vice chair position in the Dodd-Frank financial reform legislation of 2010. The provision was a direct response to perceived and actual regulatory failures – particularly the inability to see the big picture of systemic risk in the run-up to the devastating global financial crisis that erupted in September 2008. The Fed, though not the only financial regulator, is extremely influential, typically shaping how other officials and private-sector investors think about risks.