Our Economy and Climate Change: How the Federal Reserve Plans to Act

Future financial policies will likely be influenced by the impacts of climate change.


Earlier this month on November 8th, leaders in the met in their first-ever conference to discuss  and its impact on economics. Undoubtedly, climate change is already affecting ecosystems worldwide and environmentalists and communities everywhere have begun to take notice. Now, the Federal Reserve appears to be getting more and more concerned regarding the potential and widespread financial implications of climate change 

International leaders from around-the-world have already begun to look at how climate change risks may affect global financial stability and the United States is now joining them. As climate change worsens, we are likely to see monetary policies change and shift as a result. 

According to Federal Reserve Governor Lael Brainard, to fulfill the primary responsibilities of the Federal Reserve, it will be necessary for her and her colleagues to “study the implications of climate change for the and the financial system” and adapt accordingly. Specifically, they will need to remain vigilant and work to keep banks and the overall United States financial system intact as rising sea levels, increasing temperatures, and extreme weather conditions become more common.  

Brainard’s speech marks a major turning point in the Federal Reserve’s attitude towards climate change. This is the first time Brainard has even mentioned climate change since she became governor of the Federal Reserve over five years ago. Overall, Brainard stated that the main concern of the Federal Reserve will be to ensure that the effects of climate change are taken into account and policies are adjusted accordingly to ensure “maximum employment and price stability.”  

Taking Climate Change Consequences Seriously 

The Federal Reserve’s attention towards climate change could not have come any sooner. During the packed conference held in San Francisco, policymakers were given a crash course detailing research that shows how climate change has slowed economic growth, as well as how to possibly mitigate this stagnation. Hashem Pesaran, professor at the University of Southern California and one of the conference’s main presenters, spoke on how rising average temperatures and increased precipitation have been the primary culprits of low U.S. economic output. 

In addition to the change of heart from the Federal Reserve, following Paris Agreement goals could help limit losses per capita over the next 80 years from 14% to less than 3% if these goals are met, according to Pesaran. Conny Olovsson, a Swedish bank economist suggested that imposing a carbon tax may also be a solution to help offset economic losses brought on by climate change, especially if global warming continues to worsen. Carnegie Mellon University professor Nicholas Muller brought forth a more flexible solution, suggesting that Federal Reserve leaders adjust the tax rate depending on whether or not pollution levels are increasing or decreasing in any given year. 

How Homeowners are Already Being Impacted 

By looking closely, we can already see how climate change is starting to impact our everyday economy. In particular, the market is already starting to shift as a result of climate change attitudes. According to research done by the Yale Program on Climate Change Communication comparing National Oceanic and Atmospheric (NOAA) data, geographical data, and current real estate trends, certain real-estate markets are being affected by climate change ‘deniers’ and ‘believers’ alike. 

The study found that areas that have a great populous of climate change deniers are more likely to sell their homes for nearly 7% more, compared to areas where more climate change believers reside. Essentially, believers are unwilling to purchase certain properties in high-risk areas, such as beachfront properties, while deniers see these types of properties as investment opportunities.  

David Burt, a prominent financial investor in New York City that anticipated the U.S. financial crisis of 2008, is warning that history may repeat itself yet again. This time, he worries that the housing market may break due to mispricing. 

With research from economists and financial experts everywhere highlighting the potential financial consequences of climate change, the Federal Reserve will need to take heed. As we move forward into 2020, it will behoove the United States and nations everywhere to abide by the goals in the Paris Agreement and continue to fight climate change through every means possible. Otherwise, our homes, finances, and overall economy are sure to take a hit. 






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