The Fed Needs to Catch Up on Climate Risk Research. Here’s Where to Start.

Earlier this week, we expressed our concern about the likely lack of climate analysis at this year’s Federal Reserve Jackson Hole Economic Symposium, which concludes today. We anticipated that the increasingly unignorable risks that climate poses to price stability—and in turn monetary policy transmission—would be missing from the suite of papers presented. Unfortunately, we were right. 

Fed Chair Jerome Powell’s remarks focused on congratulating his monetary tightening regime in securing a return to baseline inflation targets, and hinted at imminent interest rate cuts. His postmortem on the conditions that created the highest sustained inflation spike in most of our lifetimes was to say that “much of the increase in inflation [was due] to an extraordinary collision between overheated and temporarily distorted demand and constrained supply.” If only he had dug deeper than that headline takeaway, and engaged seriously with how some of those supply constraints were driven by extreme weather and volatile energy markets.

But Powell’s remarks, while highly anticipated by market-watchers, don’t conclude the programming at Jackson Hole. They kick off a two-day quasi-academic conference, where macroeconomic researchers have the opportunity to present papers that aim to push the central bank’s theory and practice in new directions. What’s more disappointing than Powell’s climate omission is that no papers on climate risk or energy transition risk and their impacts on price stability were selected for discussion.

In our latest piece, we refer to a growing literature on these topics both from the academy and from central banks and public institutions abroad. We’d like to highlight several articles that would have benefited the discussion this weekend and could motivate improvements to Fed policy:

In “The Impact of Global Warming on Inflation: Averages, Seasonality and Extremes,” authors from the European Central Bank find that the extreme heat in the summer of 2022 led to a 0.67 percent increase in food inflation in Europe, and “future warming projected for 2035 would amplify the impacts of such extremes by 50%.” Similar analysis is critical for the Fed to undertake in order to better understand price drivers, and should be incorporated in future inflation targets to reflect a warming world. 

In “Inflation in Times of Overlapping Emergencies: Systemically Significant Prices from an Input–Output Perspective,”  authors from University of Massachusetts, Amherst find that energy prices, and specifically oil and gas prices, demonstrate significant pass-through to drive prices up in all other sectors in the economy—including those traditionally counted in Core CPE metrics. These results suggest that the Fed’s approach to abstracting energy prices from inflation targets is challenging its understanding of underlying price drivers. 

In “The Impact of Climate Transition Risks on Financial Stability. A Systemic Risk Approach,” authors from the Joint Research Centre of the European Commission find that inflation is one of the three main drivers of climate transition risk. As the Fed acts within its mandate of ensuring price stability, it must understand the connection between an unmanaged energy transition and inflation. 

The Jackson Hole symposium offers a unique opportunity for the Federal Reserve to incorporate growing macroeconomic analysis and consensus into its theoretical approach and implementation of monetary policy. Acknowledging the reality of climate and transition risks is well within the Fed’s mandate, and in fact critical to upholding it. It’s imperative that a central bank read the latest research and conduct its own analysis on climate and transition risks—as a start—and follow up by integrating that analysis into its monetary policy practice.