Along with all of the other things it must consider, the Federal Reserve needs to take into account climate change when formulating monetary policy, Fed Governor Lael Brainard said Friday.
The issue could have impact on determining the proper level of interest rates and cause systemic financial damage in a way similar to what happened during the financial crisis, the central bank official said during a speech in San Francisco.
"Increasingly, it will be important for the Federal Reserve to take into account the effects of climate change and associated policies in setting monetary policy to achieve our objectives of maximum employment and price stability," Brainard said in prepared remarks.
Among the considerations for the Fed would be whether the impact of climate change-related events such as hurricanes, wildfires and floods are temporary or long lasting. Such assessments could help determine where the Fed views the long-run "neutral" interest rate that is neither stimulative nor restrictive to growth.
"Just on its own, the large amount of uncertainty regarding climate-related events and policies could hold back investment and economic activity," Brainard said.
Should fallout from climate change intensify, it could cause asset valuations to be mispriced in a way she compared to real estate leading up to the financial crisis.
"For example, if prices of properties do not accurately reflect climate-related risks, a sudden correction could result in losses to financial institutions, which could in turn reduce lending in the economy. The associated declines in wealth could amplify the effects on economic activity, which could have further knock-on effects on financial markets," Brainard said.
She added that banks need to be prepared against such shifts and be able to identify the risks.
Brainard's speech did not otherwise address where she feels monetary policy should be. The Federal Open Market Committee last week approved its third interest rate cut this year, but officials indicated that it likely will be the last for a while.