Climate change ‘real,’ Fed governor proclaims in speech – but pooh-poohs impact on financial stability

Climate change is real, but it does not pose “a serious risk to the safety and soundness of large banks or the financial stability of the United States,” a member of the Federal Reserve Board told a conference audience in Madrid, Spain, on Thursday.

Fed Gov. Christopher Waller said “risks are risks” and that there is no need “for us to focus on one set of risks in a way that crowds out our focus on others.”

“My job is to make sure that the financial system is resilient to a range of risks,” Waller said at the At the IE University, Banco de España, Federal Reserve Bank of St. Louis Conference Current Challenges in Economics and Finance in Madrid. “And I believe risks posed by climate change are not sufficiently unique or material to merit special treatment relative to others.”

Waller said he didn’t see a need for special treatment for climate-related risks in the Fed’s financial stability monitoring and policies. “As policymakers, we must balance the broad set of risks we face, and we have a responsibility to prioritize using evidence and analysis. Based on what I’ve seen so far, I believe that placing an outsized focus on climate-related risks is not needed, and the Federal Reserve should focus on more near-term and material risks in keeping with our mandate.”

However, Waller did offer some hope to those concerned about climate change’s impact on financial stability. “Nevertheless, I think it’s important to continue doing high-quality academic research regarding the role that climate plays in economic outcomes, such as the work presented at today’s conference.”

Waller explained his view by focusing on risks typically associated with climate change: physical risks and transition risks.

“Unfortunately, like every year, it is possible we will experience forest fires, hurricanes, and other natural disasters in the coming months,” he said regarding physical risks. “These events, of course, are devastating to local communities. But they are not material enough to pose an outsized risk to the overall U.S. economy.”

As for transition risks, the Fed governor said transitions from one policy to another have always been part of the economic landscape. “While these policy changes can certainly affect the composition of industries, the connection to broader financial stability is far less clear,” he said. “And when policies are found to have large and damaging consequences, policymakers always have, and frequently make use of, the option to adjust course to limit those disruptions.”

Gov. Christopher J. Waller: Climate Change and Financial Stability