How Regional Federal Reserve Banks Can Contend with Economic Risk from Climate Change

This report from the Natural Resources Defense Council examines the role that the 12 regional Federal Reserve banks can play in addressing the growing threat of climate change to US financial and price stability. Reviewing 40 years of regional Fed reports on local economic conditions, the study looks at how the economic effects of hurricanes, wildfires, extreme rainfall events and other climate risks are covered. It concludes with four specific recommendations on how individual Reserve Banks can integrate climate considerations into their activities.

The study begins with an outline of the Fed’s tepid response to climate risk and presents an overview of the Federal Reserve system and its semi-autonomous regional Reserve banks. The cost of weather and climatic disasters in the United States is accelerating rapidly, the analysis shows, yet the overall Federal Reserve System remains far behind its international peers in responding to climate-related financial risk.

The report then turns to the so-called Beige Books, summary reviews of economic conditions in each of the Federal Reserve districts that are published eight times a year. Beige Books from 1980 to 2019 are examined, focusing on four districts with high exposure to climate change. Climate-related events and financial consequences are contrasted with Beige Book reporting across five areas: hurricanes, rainfall extremes and agriculture, wildfires, transition risk and fossil fuels, and equity and community development.

Beige Book reporting on Hurricanes seems to unduly emphasise the positive economic effects from rebuilding, the study finds, while wildfires are rarely mentioned. The reports make clear the impact of drought and dry weather on prices, but with little attention given to the effects of the prolonged droughts currently being experienced in California and the US Southwest. The decline in US demand for coal is documented, but with little discussion of renewable energy and none at all in some districts. Issues of equity and community are not generally mentioned at all.

With the notable exception of the San Francisco Reserve Bank, the analysis finds little evidence of the regional Banks incorporating climate-related economic and financial risk into their operations.

The report ends with four recommendations on how regional Federal Reserve banks can help mitigate the economic consequences of climate change and promote adaptation strategies. District Reserve banks should engage in research, data collection, and public outreach on climate-related economic and financial risk at the regional level, the authors suggest, and spotlight the economic effects of climate change in their Beige Book reports. They should also consider climate risk in their research on price stability and address the disproportionate impact of climate change on low-income communities and communities of colour.

“We cannot emphasise enough that climate concerns cannot be siloed within Federal Reserve institutions,” the report concludes. “Climate change risk cuts across all of the Federal Reserve mandates and must be integrated across all Fed functions in a whole-of-system approach.”