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Climate disasters are now costing the United States , and the economic harm is rising.

The has been disrupted, as home insurance rates skyrocket as wildfire and flood risks rise with the warming climate. have gone up with disruptions in agriculture. have increased as heat takes a toll. Marginalized and already vulnerable communities that are least financially equipped to recover are .

Despite this growing source of economic volatility, the Federal Reserve—the U.S. central bank that is charged with maintaining economic stability—i²õ in its monetary policy.

Earlier this year, Fed unequivocally: "We are not, and we will not become, a climate policymaker."

Powell's rationale is that to maintain the Fed's independence from politics and political cycles, it should use narrowly to focus on its core . That includes price stability, meaning keeping inflation low and maximizing employment. In Powell's view, the Fed should stay away from social and environmental concerns that are not tightly linked to its statutory goals.

However, it is getting to ensure stability if they do not integrate climate instability into their monetary policies.

As researchers with expertise in and , we recently reviewing the monetary policy tools available to central banks around the world that could help slow climate change and reduce climate vulnerabilities.

With the new U.S. and making clear that U.S. policies and actions are and manage the growing economic costs, we believe it's time to in .

Rethinking interest rates

One thing central banks could do is set lower interest rates for renewable energy development. The .

The Fed's aggressive increases in interest rates in response to rising inflation have toward a more sustainable society by and making infrastructure more expensive. power has been particularly hard hit, with multiple multibillion-dollar projects canceled as higher interest rates raised the projects' costs.

One way to introduce differentiated rates would be to create a special under which commercial banks could borrow money from the central bank at preferential interest rates if used for renewable energy deployment or other climate-friendly investments. Whether the Fed already has authorization to do that depends on interpretation of its current mandate.

While the U.S. Federal Reserve has not done it before, has to incentivize renewable energy, and the Bank of Japan's lending facility offers for green investments.

Nudging banks to rethink investments

Despite the Fed's proclaimed efforts not to pick winners and losers, its monetary policies have taken steps that , including the fossil fuel industry.

For example, the Fed during the COVID-19 pandemic to keep credit available to limit economic harm. Its massive resulted in .

Our analysis suggests two ways to help manage climate change now: The Fed can reinterpret its current statutory duties and start viewing climate action as a critical part of its role in maintaining economic stability within its existing mandate, , or the mandate of the Fed can be changed by Congress to explicitly include "green" transformation objectives, similar to the .

Either of these options could empower the Fed and support the government, businesses, banks, households and communities in financing climate mitigation and adaptation efforts.

The Fed could also discourage banks and investors from investing in assets that ultimately harm the economy—for instance, by for banks that would reduce the . The European Central Bank recently announced that it would tilt purchases of .

The Fed has recently taken steps to push in their portfolios, , who claimed the bank had no authority to consider climate change. Whether this risk management approach will pressure banks to change their lending patterns is not yet clear.

The Fed and other central banks could go further and with an eye toward economic stability. The European Union developed a designed to in economic activities that do not support an energy transition along the lines of the , which aims to turn Europe into a climate-neutral continent with no one left behind. The European Central Bank is obligated to support EU economic policies, including the green transition.

The Fed has used creative tools before

Many times in its 110-year history, the Fed has during major crises, such as wars and recessions, by offering direct lines of credit or by directly purchasing Treasury bonds. During the pandemic, it took extraordinary steps to keep U.S. businesses running.

Now that the U.S. is facing rising costs from the climate crisis, we believe the Fed should treat climate change with the same urgency and importance.

In our analysis of the tools available to central banks, we took a perspective, looking beyond greenhouse gas emission reductions to incorporate social justice and economic equity. Instead of focusing on supporting corporate interests and the financial sector in the short term to stabilize markets, we believe central banks could by funneling investments toward vulnerable communities and people.

The , the and other central banks are already implementing some . At the Fed, Powell seems more concerned with political backlash than the economic damage to the U.S. economy outlined in the latest climate assessment.

We believe it is past time that the Fed consider climate destabilization as a major economic crisis and use more of the tools in the central bank toolbox to tackle it.

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