In recent weeks, the climate movement has become caught in the middle of a fight that seemingly has nothing to do with the environment: Should President Joe Biden renominate Jerome Powell to lead the Federal Reserve?
The choice of who should run the country’s central bank has historically not captivated climate advocates—or many Americans, for that matter—yet it has carved the left into two opposing camps, each claiming to fight for a greener economy.
On one side, a group of pro-Powell employment hawks argue that Powell has overturned right-wing orthodoxy that has needlessly cramped economic growth and impoverished American workers for decades. Their opponents—let’s call them the regulation hawks—say that Powell and other Republican Fed governors have gone too easy on big banks and are now risking a climate-induced financial crisis.
Even weirder than the fight happening at all is the fact that many of Powell’s climate critics say that he has done a good job executing the Fed’s most important duty. “Why the climate base is increasingly fired up about the Fed … has absolutely nothing to do with monetary policy,” Justin Guay, a prominent climate-finance activist, told me. Would anti-war progressives try to replace an openly pacifist secretary of defense because they disagreed with his management of DARPA? This is not so far from what’s happening in the Fed-chair fight.
It is a strange fight, but an important one. Although Powell’s term does not expire until February, Biden will reportedly decide whether to renominate him by Labor Day—and whom Biden picks could shape the rest of his presidency, determine the success of his economic agenda, and even influence his long-term legacy. But the fight isn’t really just about who will chair the Fed a few months from now. It has as much to do with the climate movement’s ultimate goals, and what kind of economy activists hope to bring about.
There comes a time in every American’s life when they have to sit down and understand what the Federal Reserve actually does. Congrats! Today is your day. The secret of the Fed is that although its work seems dreadfully boring and unimportant, that tedium conceals unbelievable power. “The Federal Reserve is one of the most powerful, most underappreciated, and most misunderstood branches of the federal government,” says Mark Paul, an economics and environmental-studies professor at New College of Florida. Branch is apt: Over the past few decades, the Fed chair has arguably wielded power over even the White House and Congress.
The Fed’s most important duty is that, eight times a year, it turns a knob that sets interest rates across the United States. Essentially, those rates determine (1) how much banks pay people to save money and (2) how much banks charge people to borrow money. When the Fed raises interest rates, it makes it more expensive to borrow money, which depresses the economy by discouraging Americans from buying things, especially very expensive purchases such as cars and homes. When the Fed lowers rates, it makes it cheaper for people to borrow money, which in turn accelerates economic activity.
The Fed is supposed to weigh two goals when turning this knob: First, it works toward making sure that every American who wants a job can find one, a state called full employment. It does this by lowering interest rates and boosting economic activity. Second, the Fed fights inflation by raising interest rates and cooling economic activity. Generally, Fed leaders have argued that a trade-off exists between these goals: If more Americans have jobs and companies have to compete over workers, then those workers will demand raises, fueling inflation.
That idea may seem dry and technical, but it has profoundly shaped the American economy over the past four decades. In 1979, President Jimmy Carter nominated the economist Paul Volcker to lead the Federal Reserve. Vowing to “slay” that decade’s rampant inflation, Volcker hiked interest rates so quickly that he drove the U.S. economy into its deepest recession since World War II. The downturn put 12 million Americans out of work, helped destroy the industrial Midwest, and permanently reshaped the country’s labor market. Since then, fighting inflation at all costs has functionally eclipsed achieving full employment as the Fed’s biggest goal. Labor participation has never returned to its pre-Volcker highs, and the average American worker has not gotten a raise in inflation-adjusted terms since 1979.
Powell has broken with that legacy. Since Donald Trump nominated him in 2017, Powell has pushed back on the idea that the Fed needs to be hypervigilant about inflation and persuaded the other Fed governors to unanimously adopt a new framework that aims for “maximum employment.”
This new way of thinking has meant that, weirdly enough, Powell, a Republican, has consistently backed Biden’s agenda. In March, when Biden pushed Congress to pass the American Rescue Plan, Powell told lawmakers not to worry about the deficit, even when some Democrats were concerned about it. (In 2009, by contrast, then–Fed Chair Ben Bernanke warned about the deficit just as President Barack Obama sought to pass a climate bill. Bernanke’s comments pushed Obama to limit federal budgets in the years that followed.) Yet even as Powell has revised the Fed’s approach, he has retained credibility with Republican lawmakers who steadfastly oppose Biden’s economic plans. “He seems to have got a lot of Republican support without doing a lot of Republican things,” says Skanda Amarnath, the executive director of Employ America, a progressive group that views Powell favorably.
Under Powell, the Fed has even inched toward acting on climate change. In December, the Fed became the last major central bank in the world to join the Network for Greening the Financial System, an international financial-study group. In the winter, Powell hired a regulator named Kevin Stiroh to run the Fed’s new climate efforts. “I took that as a very welcome step,” Sarah Dougherty, a former Fed economist who now works at the Natural Resources Defense Council, told me. (So far, Stiroh hasn’t said or done much, though, other than mentioning that the Fed is having informal regulatory conversations about climate change with banks.)
For Powell’s supporters in the climate movement, his stance on full employment alone is what qualifies him for another four years. “There’s simply no question that Powell can be thought of as a climate advocate given his stance on full employment,” Paul, the New College economist, told me. “We can and should think about what’s happening at the Fed as a full-employment victory, but that is a tenuous victory.” Biden could lock it in by renominating Powell.
But to regulation hawks, that idea isn’t just wrong; it’s odious. They allege that Powell has put the American financial system at risk of a climate-induced breakdown. That’s because, apart from turning the knob that raises and lowers interest rates, the Fed has some other responsibilities too—including regulating banks. And even while Powell has presided over a massive paradigm shift, the Fed has a few regulatory tools that nearly everyone agrees could be used more aggressively against climate risk.
For instance, the Fed could factor climate change into its oversight of banks through a mechanism called stress testing. Every year, Fed regulators sit down with bank officials and walk them through several scenarios in which the economy falls apart. If, say, the housing market were to collapse, the regulators ask, could their bank stay solvent? What unfolds is kind of like a video game, if video games were very boring and played in Microsoft Excel. The regulation hawks want regulators to add some climate-related scenarios to that battery of exams: What would happen, say, if wildfires continued to exponentially expand, sea-level rise accelerated, and Congress was forced to impose a $200-a-ton carbon tax in 2030?
This move, or any of the many others that Powell could take, would not be particularly radical compared with what the rest of the world is doing, but at least so far Powell has not done it. Powell “seems to be an enemy of financial regulation across the board,” David Arkush, a climate advocate at the nonprofit Public Citizen, told me. As proof, regulation hawks point to Powell’s three-year-long refusal to join the Network for Greening the Financial System. “The lowest-possible hanging fruit,” Gregg Gelzinis, an economic-policy expert at the Center for American Progress, called the membership decision. “It was just a symbol. They refused to do it until after the 2020 election—which is interesting timing given that in no sense is the Fed political whatsoever.”
Anyway, the regulation hawks would like to go further. Erik Gerding, a law professor at the University of Colorado and one of the movement’s intellectual leaders, worries that climate change has increased the risk that certain fossil-fuel assets, such as oil fields, will rapidly lose their value all at the same time, punching billion-dollar holes in bank balance sheets. Gelzinis wants the Fed to force banks to hold more capital when they lend to fossil-fuel companies in order to absorb those losses. That would function as a sort of nuisance law, potentially limiting oil and gas investment.
All of these ideas, mind you, won’t directly reduce carbon pollution. “I understand a lot of people want there to be a payoff in terms of reduced carbon emissions,” Gerding told me, but that sort of effect is “hard to quantify.” Rather, climate rules will put banks on the right side of the issue, regulation hawks say, and keep climate change from imperiling the financial system as a whole. A worthy goal—but obviously climate activists didn’t get into this to save the banking system.
Those are some flimsy grounds on which to fire Powell. I’ll cut to the chase: Biden should renominate Powell for the climate’s sake. The argument for keeping him is simple. Biden wants to do a lot of hard things to combat climate change, including passing an infrastructure bill, regulating car and truck pollution, revitalizing American industry, and attaining full employment. Powell is a Republican who wants to reach full employment. By keeping him, the president can spend more political capital on his other goals. That’s really it.
If Powell is replaced by a Democrat, there’s no guarantee that his successor would continue to keep interest rates low. But even if that did happen, the Fed’s new framework would inherently become much more polarized. Powell has overturned orthodoxy while somehow miraculously retaining the support of GOP lawmakers, the nonpartisan political press, and the financial markets. The anti-Powell crowd should not assume that another Fed chair could do the same.
And make no mistake, full employment is essential to addressing climate change. Although no politician wants to say it, decarbonizing will require what economists euphemistically call “restructuring”: Fossil-fuel firms will go bankrupt, and their workers will lose their jobs. That restructuring will be easier and more politically feasible in a hot economy in which workers do not feel like they have to mine coal or drill oil to make a good living. Little wonder that the post-Volcker era—with its anemic labor markets and widening inequality—is the same period in which America has failed to do much of anything about climate change.
What worries me is that climate activists have embraced allies in this fight who are obsessed with only one of the Fed’s many duties, and who seem not to understand a basic political fact: that in the post-Volcker era, the Fed chair basically has a veto over congressional spending. Lawmakers can spend as much money as they want, but the Fed chair can always hike interest rates and smother economic growth. When I spoke with Gerding, he criticized low interest rates themselves, arguing that they may actually be worsening climate change by encouraging investors to speculate on financial markets and adopt carbon-intensive cryptocurrencies. “I’m not sure low, low interest rates help in terms of decarbonization,” he said.
I could not disagree more. When interest rates are low, the federal government can borrow more money. If the Fed hiked interest rates, then the left’s dream of passing a Green New Deal would immediately become impossible. “If we want the federal government to spend trillions of dollars on climate change over the next decade, we need the Fed to maintain a low-interest-rate environment,” Paul said.
Since the pandemic began, some of the most prominent climate-activist groups have repeatedly made bad decisions when it comes to the economy. They opposed the CARES Act because it bestowed some of its fiscal generosity on fossil-fuel firms—even though the bill turned out to be one of the most progressive pieces of legislation this century. They campaigned against Brian Deese, Biden’s choice to lead the National Economic Council, because he led a climate initiative at the asset manager Blackrock—even though Deese has turned into one of the White House’s most aggressive climate hawks. When it looked like Lael Brainard might become Biden’s Treasury secretary, some climate activists opposed her too—even though Brainard is now the movement’s top pick to lead the Fed.
What is playing out is a version of one of the longest-running disputes in climate policy: Should progressives try to fight climate change by building a more prosperous but zero-carbon society, or should they reduce carbon pollution by limiting consumption and basically returning to the land? During the Trump administration, climate activists seemed to choose the former, lining up behind the only ever notionally described Green New Deal.
Yet now that the time has come to get specific about pro-growth climate policies, to write and pass something that will decarbonize the economy while increasing the living standards of actually existing Americans in the actually existing American economy, activists have blanched. Their anti-consumption streak—their fear of getting their hands dirty with political trade-offs—has betrayed them, and caused them to partner with groups and interests that would make decarbonization impossible.The planet cannot afford a climate movement that is so ignorant about the economy.