Republican senators demand Fed curbs ‘climate activism’

May 23, 2023|Written by |Federal Reserve

Republican senators are urging the Federal Reserve to limit its involvement in climate change initiatives, citing concerns about high inflation and turmoil in the banking sector.

A group of nine lawmakers wrote a letter to Fed chairman Jerome Powell expressing their frustration with the central bank’s engagement in environmental policymaking and research. They argued that these activities are beyond the scope of the Fed’s statutory mandate.

In the letter, the senators called on Powell to reign in the Fed’s regional banks and economists, who they believe are disregarding his leadership. They also emphasised that the Fed’s credibility is at stake and warned that history will judge Powell as either complicit or ineffective if a course correction is not made.

These recriminations have come even though Powell himself has maintained it would be inappropriate to use monetary policy in the context of climate change. Meanwhile, another Fed board member has recently come under scrutiny for declaring that climate change is not a serious risk to financial stability.

The letter was spearheaded by senator Dan Sullivan, who has faced previous criticism for questioning the scientific consensus on the causes of climate change. Specifically, the letter condemned the Fed’s recent announcement of a pilot climate risk analysis exercise which will involve scenario analysis to assess the resilience of financial institutions under different hypothetical climate scenarios. Six of the largest banks in the country are set to participate in the test which is a manifestation of growing “climate activism” according to the letter.

The damning letter criticised the Fed’s “inept oversight leading to the SVB crisis” and claimed that the Fed is “actively signalling that bank activities that do not further the goals of net zero by 2050 are inherently risky and disfavored. This drives capital away from traditional energy development at a critical time for our economic and national security, while empowering America’s adversaries.”

The letter downplays any action needed from the Fed with regard to physical and transition risks. This is in direct opposition to a recent IMF analysis which showed that the longer central banks wait, the larger the output-inflation trade-offs and consequential damage to bank credibility.

The lawmakers called the Fed’s climate change work as “shoddy research at best, and blatant propaganda at worst”. The letter reflects a broader resistance against government and financial sector involvement in climate and ESG initiatives.

This page was last updated May 24, 2023

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