Dear Yellen: Saving the planet is not the Fed’s job
On March 31, the Financial Stability Oversight Council (FSOC) had its first principal meeting under the new leadership of Treasury Secretary Janet Yellen. Climate change was the top agenda item. In terms of “emerging risks,” Yellen was clear in her remarks: “Climate change is obviously the big one.” According to the secretary, climate change “is an existential threat to our environment, and it poses a tremendous risk to our country’s financial stability.”
The secretary is right that climate change is a challenge confronting the government, especially and including the fiscal authorities. But one question is whether Yellen has her eye on the Fed’s balance sheet and its new monetary tool of quantitative easing (“QE”). Other central banks are pursuing what is now referred to as “Green QE” — using the central bank balance sheet, through asset purchases, to proactively make the financial system greener. Green QE has been considered by the European Central Bank, and the Bank of England’s Monetary Policy Committee now has within its monetary policy remit the obligation to consider price stability in terms of what is “environmentally sustainable.”
The Fed, like these other central banks, wheeled out QE as an “unconventional”tool for monetary policy to fight the fires of financial and economic crisis in the past decade. The efficacy and legitimacy of QE is still debated. A crisis-time use of QE to calm markets, hit inflation targets or stymie aggregate demand – by buying government-backed bonds – is one thing. The notion of a steady-state use of QE to accomplish policy items on the executive’s agenda, by funneling credit to some private corporate issuers and not others, is quite another.
Many commentators have argued that it would be “mission creep” for the Fed to offensively tackle climate change in this way. If the executive were to put pressure on the Fed to engage in mission-creep around climate, one wonders what could be next and who will draw the line. The FSOC’s first meeting begs the question: Is the executive keen to morph the Fed’s now expanded wartime balance-sheet powers into a peacetime tool for making climate credit policy?
We should be wary of heading in that direction. The Fed’s independence from the Treasury was hard-won long ago in the so-called Fed-Treasury Accord of 1951. But today the Treasury may well have a new vehicle for exerting policy pressure through the secretary’s leadership (and other Council members in agreement) of the Financial Stability Oversight Council. The FSOC is a multi-member council, but as spearheaded by the Treasury secretary, it can reasonably be expected to reflect or reinforce executive priorities.
The FSOC, though not a formal regulator, has the power to make recommendations to its member agencies, including the Fed. Though non-binding, these recommendations could become a high-octane, high-profile source of pressure on the Fed and other independent regulatory agencies (such as the U.S. Securities and Exchange Commission) to tweak their policy analyses in ways consistent with the administration’s views.
The clear implication that the FSOC sees climate change as a financial stability risk puts the Fed in a sticky position. The Fed is still working out its views on the nexus between climate change and financial stability, in view of its technocratic expert macroeconomic judgment and unique insight into big bank balance sheets and planning processes. So, these kinds of statements from a body that can determine the Fed’s jurisdiction – through its power to designate nonbank institutions as systemically important – and make formal recommendations for new regulation has potential to nettle the Fed’s operational and decisional independence.
Recommending that the Fed take a position on climate change could become a fait accompli for more interventionist policy, like green QE or the imposition of “green” collateral requirements for access to the discount window. That kind of credit policy, reflecting social values, is for the fiscal authority to decide (and the executive and legislative branches more generally to sort out). The Treasury should not hoist that on an independent Fed.
Throughout its 107 years of existence, the Federal Reserve has at various intervals had to fight presidents and Treasury secretaries to maintain its independence. It could face that challenge again today. But unfortunately for the Fed, unlike in periods past, it is not just faced with rebuffing political entreaties for easy money, which might seem anodyne to most Americans not seeped in the central bank’s affairs. Instead, in defending its independence today, the Fed could be put in the much more uncomfortable position of appearing to reject the underlying issue and drawing much greater public ire.
This is not a commentary about the climate change problem in itself. Instead, it’s reinforcing a generalizable point made by former U.K. Chancellor of the Exchequer George Osborne in 2012. In explaining HM Treasury’s relationship of power with the Bank of England, he remarked, “Independent central banks should not be put under pressure to do what governments do not have the courage to do on their own account.”
We should be careful about opening a Pandora’s Box of political pressure on the Fed to make decisions about which sectors of the economy deserve credit and which do not.
Christina Parajon Skinner is an assistant professor of legal studies and business ethics at the Wharton School at the University of Pennsylvania.