Commonly referred to as “The Fed,” The Federal Reserve Bank System is the central bank of the United States. Its mission is “to foster the stability, integrity, and efficiency of the nation's monetary, financial, and payment systems so as to promote optimal macroeconomic performance.”
Because the climate crisis poses direct and growing threats to the financial system, the Fed has a crucial role to play in supporting our transition to a more sustainable economy. European central banks have already taken significant actions such as excluding fossil fuels from their bond-buying programs.
Early in the pandemic, the Fed used its emergency-lending authority to sponsor a range of programs aimed at buoying the economy. Although the programs were ostensibly designed to support all industries, critics have noted that the Fed effectively favored fossil fuels, affirming the industry’s status in the current economy rather than finding ways to ease its ongoing and inevitable decline. For example, the Fed overweighted fossil fuels in the portfolio of bonds it bought on the secondary market and tweaked the lending standards for another program to ensure oil and gas companies could participate.
Before most of the programs wound down at the end of 2020, the Fed — led by Jerome Powell, a Trump appointee — steadfastly refused to acknowledge its role in the risks associated with climate change. After the election of President Joe Biden, however, some promising signals emerged: The Fed announced that it would be joining the Network for Greening the Financial System and discussed climate risks briefly in an annual report to Congress.
The Fed system comprises three parts: (1) 12 regional banks with independently appointed presidents; (2) the Federal Open Markets Committee (FOMC) which sets national monetary policy; and (3) the Board of Governors.
Historically, independence from political influence has been pivotal to the Fed’s execution of its mission to serve the long-term public interest. The system was structured to promote this independence: The seven governors, chair, and vice-chair of the board are nominated by the president and confirmed by Congress. The governors’ 14-year terms and the chair and vice chair’s four-year terms are staggered to minimize the influence of any one presidential administration.
The Fed is not typically funded by congressional appropriations. Except in times of crisis, its budget is generated from returns on its asset portfolio, predominantly government securities bought on the open market. Any income in excess of operational expenses is deposited into the U.S. Treasury.
The Fed was established in the wake of a 1907 financial panic. To promote stability, Congress passed the Federal Reserve Act in 1913. Fed powers were expanded in 1932, in the wake of the Great Depression, with the Emergency Relief and Construction Act and the addition of Section 13(3) to the Federal Reserve Act. Section 13(3) empowered the Board of Governors to authorize reserve banks to extend credit to individuals, partnerships, and corporations in “unusual and exigent circumstances.”
This language attracted little notice until it was dusted off during the 2008 financial crisis to aid non-bank institutions for the first time since 1936. In 2020, the Fed again drew on 13(3) in response to the COVID-19 crisis, using taxpayer money authorized by Congress under the CARES Act to fund new bond-buying and lending programs.
Fed policy bans the use of emergency lending to aid specific industries. The fossil fuel industry's influence over the Main Street Lending Program, leading to outsized participation by oil and gas companies,raises doubts about the Fed's adherence to that rule.