Fed’s Daly says climate change poses ‘significant’ economic risk

Climate change poses a “significant risk” to the global economy and the financial system, San Francisco Federal Reserve President Mary Daly said on Tuesday, adding that large swaths of the United States could be disrupted.

The economic reckoning with the effects of climate change – everything from how people work to what crops can be grown to property damage and capital investment – may also be unevenly felt across communities, Daly said in remarks prepared for delivery at a virtual event at the Peterson Institute for International Economics.

“As monetary policymakers, our job is to navigate this uncertainty,” she said. “No one really knows the severity and scale of climate change, where and who will be most affected, or the nature, extent, and duration of our response to the risks.”

Republicans have criticized the U.S. central bank for delving into the effects of climate change, saying that doing so distracts it from its congressionally-mandated job to pursue full employment and stable prices.

Daly argued on Tuesday that climate change can and is directly affecting both employment and prices, and understanding its effects are, as a result, squarely in the Fed’s purview.

It could even affect the savings rate, labor productivity and capital investment, she said, potentially pushing down on the long-term neutral rate of interest, which would give the Fed reduced leeway to fight future economic downturns with conventional monetary policy.

Asked specifically to respond to criticisms that the Fed is veering from its policy lane, Daly said she disagrees.

Unlike other central banks, she said, the Fed is not charged with facilitating the nation’s transition to green energy or promoting specific environmental policies, she said.

But it still must be attuned to the effects of such a transition on banks and their balance sheets, as well as on the economy writ large, she said.

“We have a very narrow remit,” she said, tasked with looking after the economy, the financial system and the payment system.

Climate change and climate risk affect all three of those responsibilities, she said.

“I don’t think of what we are doing as activism; I think of it as doing our job,” she said.