The US Federal Reserve’s leadership constantly stresses the importance of “data dependence.” Yet, in order to appease Donald Trump, the Fed has decided to ignore a huge – and rapidly growing – pile of data showing that climate risks pose a grave threat to economic and financial stability.
WASHINGTON, DC – Donald Trump is back in the White House, and the technocrats are running for cover. Trump has made clear his desire to dismantle the “deep state,” which he depicts as a shadowy network of bureaucrats who “weaponize” the “power of the state” to “persecute political opponents” and thwart their agendas.
But the professional officials, administrators, and policymakers Trump is poised to target play a critical role in government, including by advising leaders, regardless of their political leanings, on how they can achieve their goals legally and constitutionally. These officials must stand their ground.
The Federal Reserve is perhaps the most significant independent economic actor in the United States, given the scope of its monetary and supervisory responsibilities and the global importance of the US dollar. Unfortunately, rather than preparing to defend its positions and prerogatives, it has preemptively surrendered to Trump: on January 17, three days before Trump’s inauguration, the Fed Board withdrew from the Network for Greening the Financial System (NGFS).
The NGFS brings together central banks and supervisors to improve environmental- and climate-risk management in the financial sector. Participation in the group amounts to a recognition of the importance of understanding climate risks, as well as an implicit acknowledgment that these risks fall within central banks’ mandate, because they threaten economic and financial stability.
It is hardly a radical position. All major central banks are represented among the NGFS’s 143 members: the Bank of England (BOE), the Banque de France, the Bank of Japan, the European Central Bank (ECB), and the People’s Bank of China (PBOC). Until the Fed’s withdrawal, the NGFS covered 100% of global systemic banks and 80% of the internationally active insurance groups. But the Fed has now broken with its peers and headed for the exit, arguing that the scope of the NGFS extends beyond its mandate.
The idea that central banks should not account for mounting climate risks is plain wrong. Economic and financial stability depend on ecosystem and climate stability. With greenhouse-gas emissions continuing to grow, atmospheric carbon-dioxide levels have reached record heights, and global temperatures are on track to rise well past 1.5°C above pre-industrial levels. The impact of climate change – more frequent and intense storms, floods, droughts, and wildfires – is already apparent.
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While estimates of the precise economic and financial costs vary, the overall picture is sobering. The Institute and Faculty of Actuaries forecasts that climate change will mean global GDP losses of 50% between 2070 and 2090. Prefer a lower estimate? Swiss Re predicts GDP losses of 18% by 2050 if no action is taken.
Whichever forecast you choose, there is no doubt that the costs of climate change are rising – and not at a steady pace. Instead, costs rise gradually, then sharply, propelled by climate-related disasters. In a bleak but telling coincidence, the Fed’s withdrawal from the NGFS comes at a time when California is experiencing this firsthand, as wildfires turn thousands of homes, businesses, and ecosystems to ash.
The micro-prudential risks are obvious. Those burned structures were mostly under mortgage. But insurance is unlikely to cover the full cost of rebuilding even for those with coverage, and many property owners were under- or uninsured, precisely because rising risks due to climate-fueled disasters have driven up rates and caused some insurers to refuse to offer coverage. If the destroyed properties are not rebuilt, the associated mortgages will not be repaid, and the local and national banks that issued the loans will suffer heavy losses.
This observation cannot be dismissed as tree-hugging political correctness. On the contrary, given its potential to destabilize the financial system, it clearly warrants central bankers’ attention. That is why the BOE and the ECB are stress-testing supervised firms, banks, and insurance companies for climate risk, and imposing standards for climate disclosure, methodologies, processes, and governance. The PBOC, for its part, is incorporating climate change into financial regulation and oversight, and developing green lending rules.
But the Fed – the world’s most important central bank – has other plans. By withdrawing from the NGFS and turning its back on climate-risk scenarios and analyses, it has effectively announced that it plans to close its eyes and ears to the dangers of the climate crisis. This increases the likelihood of future systemic failures, because Fed officials are less likely to detect risks that are materializing right in front of their bank supervisors’ eyes, whether in California, Louisiana, Florida, or Texas.
The Fed’s leadership constantly stresses the importance of “data dependence.” Yet the central bank has decided to ignore a huge – and rapidly growing – pile of data showing that climate risks are economic risks, in order to appease a president who might not even know the NGFS exists. The Fed Board could have maintained its NGFS membership and bided its time. There was no reason to jump before being pushed.
But the Fed is running scared. Withdrawing from the NGFS suggests that its decision-making will at least partly reflect political pressure, not independent, data-driven analysis. That does not bode well for the next four years – and beyond.
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WASHINGTON, DC – Donald Trump is back in the White House, and the technocrats are running for cover. Trump has made clear his desire to dismantle the “deep state,” which he depicts as a shadowy network of bureaucrats who “weaponize” the “power of the state” to “persecute political opponents” and thwart their agendas.
But the professional officials, administrators, and policymakers Trump is poised to target play a critical role in government, including by advising leaders, regardless of their political leanings, on how they can achieve their goals legally and constitutionally. These officials must stand their ground.
The Federal Reserve is perhaps the most significant independent economic actor in the United States, given the scope of its monetary and supervisory responsibilities and the global importance of the US dollar. Unfortunately, rather than preparing to defend its positions and prerogatives, it has preemptively surrendered to Trump: on January 17, three days before Trump’s inauguration, the Fed Board withdrew from the Network for Greening the Financial System (NGFS).
The NGFS brings together central banks and supervisors to improve environmental- and climate-risk management in the financial sector. Participation in the group amounts to a recognition of the importance of understanding climate risks, as well as an implicit acknowledgment that these risks fall within central banks’ mandate, because they threaten economic and financial stability.
It is hardly a radical position. All major central banks are represented among the NGFS’s 143 members: the Bank of England (BOE), the Banque de France, the Bank of Japan, the European Central Bank (ECB), and the People’s Bank of China (PBOC). Until the Fed’s withdrawal, the NGFS covered 100% of global systemic banks and 80% of the internationally active insurance groups. But the Fed has now broken with its peers and headed for the exit, arguing that the scope of the NGFS extends beyond its mandate.
The idea that central banks should not account for mounting climate risks is plain wrong. Economic and financial stability depend on ecosystem and climate stability. With greenhouse-gas emissions continuing to grow, atmospheric carbon-dioxide levels have reached record heights, and global temperatures are on track to rise well past 1.5°C above pre-industrial levels. The impact of climate change – more frequent and intense storms, floods, droughts, and wildfires – is already apparent.
Secure your copy of PS Quarterly: The Year Ahead 2025
Our annual flagship magazine, PS Quarterly: The Year Ahead 2025, has arrived. To gain digital access to all of the magazine’s content, and receive your print copy, subscribe to PS Digital Plus now.
Subscribe Now
While estimates of the precise economic and financial costs vary, the overall picture is sobering. The Institute and Faculty of Actuaries forecasts that climate change will mean global GDP losses of 50% between 2070 and 2090. Prefer a lower estimate? Swiss Re predicts GDP losses of 18% by 2050 if no action is taken.
Whichever forecast you choose, there is no doubt that the costs of climate change are rising – and not at a steady pace. Instead, costs rise gradually, then sharply, propelled by climate-related disasters. In a bleak but telling coincidence, the Fed’s withdrawal from the NGFS comes at a time when California is experiencing this firsthand, as wildfires turn thousands of homes, businesses, and ecosystems to ash.
The micro-prudential risks are obvious. Those burned structures were mostly under mortgage. But insurance is unlikely to cover the full cost of rebuilding even for those with coverage, and many property owners were under- or uninsured, precisely because rising risks due to climate-fueled disasters have driven up rates and caused some insurers to refuse to offer coverage. If the destroyed properties are not rebuilt, the associated mortgages will not be repaid, and the local and national banks that issued the loans will suffer heavy losses.
This observation cannot be dismissed as tree-hugging political correctness. On the contrary, given its potential to destabilize the financial system, it clearly warrants central bankers’ attention. That is why the BOE and the ECB are stress-testing supervised firms, banks, and insurance companies for climate risk, and imposing standards for climate disclosure, methodologies, processes, and governance. The PBOC, for its part, is incorporating climate change into financial regulation and oversight, and developing green lending rules.
But the Fed – the world’s most important central bank – has other plans. By withdrawing from the NGFS and turning its back on climate-risk scenarios and analyses, it has effectively announced that it plans to close its eyes and ears to the dangers of the climate crisis. This increases the likelihood of future systemic failures, because Fed officials are less likely to detect risks that are materializing right in front of their bank supervisors’ eyes, whether in California, Louisiana, Florida, or Texas.
The Fed’s leadership constantly stresses the importance of “data dependence.” Yet the central bank has decided to ignore a huge – and rapidly growing – pile of data showing that climate risks are economic risks, in order to appease a president who might not even know the NGFS exists. The Fed Board could have maintained its NGFS membership and bided its time. There was no reason to jump before being pushed.
But the Fed is running scared. Withdrawing from the NGFS suggests that its decision-making will at least partly reflect political pressure, not independent, data-driven analysis. That does not bode well for the next four years – and beyond.