By Michael S. Derby 

The Federal Reserve stands ready to respond to climate-change related weather disruptions to the economy and is working to ensure banks' resilience from unexpected shocks tied to a warming global environment, Fed Chairman Jerome Powell told Congress in an April letter.

"Although addressing climate change is a responsibility that Congress has entrusted to other agencies, the Federal Reserve does use its authorities and tools to prepare financial institutions for severe weather events," Mr. Powell wrote in a letter to Sen. Brian Schatz (D., Hawaii), on April 18.

"Over the short term, these events have the potential to inflict serious damage on the lives of individuals and families, devastate local economies (including financial institutions), and even temporarily affect national economic output and employment," Mr. Powell wrote. "As such, these events may affect economic conditions, which we take into account in our assessment of the outlook for the economy," the central bank leader said.

Mr. Powell's letter came in response to a Jan. 25 letter from Mr. Schatz in which, according to Mr. Powell, the senator urged the Fed to manage climate-change risks to the financial system and to prepare the banks it supervises for similar contingencies.

In his letter, Mr. Powell echoed comments he made while testifying before Congress in late February in which he framed climate-change risks primarily as a matter of bank supervision. The Fed chief played down climate-change issues as a high-priority issue for monetary policy.

The Fed uses its short-term rate target to help achieve its job and inflation goals, but it has said little about how climate-change related disruptions might affect its policy choices. Research from some regional Fed banks has pointed to considerable disruption in coming years if nothing is done to mitigate rising global temperatures, which scientists broadly agree are driven by human activity.

Some regional Fed leaders have said the central bank may need to take on the issue more aggressively, as some central banks in Europe are doing. Philadelphia Fed leader Patrick Harker said last November that "there is no question we're going to have to start factoring this more and more" into how the central bank thinks about the future of the economy.

Others at the Fed believe climate change isn't something that matters much for monetary policy. "It's hard for me to imagine the climate changing sufficiently to affect the next three to five years and how we look at the potential growth rate of the U.S. economy," Minneapolis Fed leader Neel Kashkari said in a March interview.

In his letter, Mr. Powell said the Fed was mostly in a reactive mode regarding climate change.

"In our framework, severe weather events are treated as shocks to the system," Mr. Powell wrote, adding that such events are hard to anticipate.

"Some potential risks are difficult to quantify and especially if they materialize over such a long horizon that methods beyond near-term analysis and monitoring are appropriate," Mr. Powell wrote. "Accordingly, we rely on ongoing research by academics, our staff, and other experts to improve our understanding and measurement of such longer-run or difficult-to-quantify risks."

Sen. Schatz responded Monday on Twitter to the letter from Mr. Powell, saying he had asked other major U.S. regulators about their climate-change preparedness, all of which replied.

"There is no way to say this diplomatically. Their answers were garbage. The highlights: according to the Fed, severe weather isn't new and climate change isn't their responsibility. The American agencies that oversee the financial system have decided to ignore climate change," Mr. Schatz tweeted.

"This is in direct contrast to almost every other industrialized country and their regulatory agencies. Whether they are run by right wing or left wing governments, everyone else is taking financial risk related to climate change seriously. Except in America," the senator wrote.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

May 07, 2019 17:29 ET (21:29 GMT)

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