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How the Fed Could Go Green Faster

Now that the US Federal Reserve has begun to speak more openly about climate change, it should take a hard look at the tools that it already has available for making a dent in the problem. What it will find is that some green monetary policies serve both the environment and the economy.

BOSTON – The US Federal Reserve has made a number of climate-related announcements in recent months, joining the Network for Greening the Financial System in December and then establishing a new Supervision Climate Committee in February. Yet while these are important first steps, the Fed should do more to address climate change, which in turn can help it meet its mandate.

Although President Joe Biden has made clear that climate considerations will influence all of his administration’s fiscal decision-making, this does not take the central bank off the hook. But the Fed, concerned about its independence, is wary about deploying the unconventional tools needed to bring monetary policymaking onto the same page.

The Fed has already gone well beyond manipulating the overnight bank lending rate (the benchmark for borrowers and savers across the economy) and waded deep into unconventional waters, such as when it started buying assets in response to the COVID-19 pandemic. It says it does not want to pick winners and losers, but it already does: anyone holding assets that the central bank buys ends up a winner.