Be Careful What You Wish For

Remember when over the past four years, we were warned repeatedly about the dangers of “politicizing” the Federal Reserve? Well, apparently, that had nothing to do with politics per se, just which side was doing the politicizing. Now that a different party is pushing the Fed in another direction, we don’t hear much about the dangers of politicizing the Fed anymore.

Indeed, an op-ed in the Financial Times goes one step further, arguing that the Fed – and central banks in general – should not only be above politics but allowed to dictate the rules for us mere mortals by executive fiat. And what issue is so important that it can’t be left to our elected representatives to decide what to do? Well, climate change, of course.

“We are facing a climate emergency that demands collective action, and central banks must undergo another transformation, perhaps an uncomfortable one, to play their part in dealing with it,” the author writes. “By reshaping their interventions in asset markets, they can accelerate reductions in carbon emissions and change the cost of capital to address hidden climate risks in the financial system.”

“The magnitude of the physical risks associated with climate change means central banks need to use their full suite of powers to help the transition towards a low-carbon world. And one of their tools is speed,” the writer continues. “Rather than waiting for governments to agree on legislation, investment programs or carbon taxes, central banks can act now to reflect better the cost of climate change in the cost of capital and to change the behavior of businesses, increasing it for emitters and lowering it for investment in carbon reduction (emphasis mine).”

In other words, who needs laws when the Fed can just order us around?

To put this into practice, the writer calls for central banks to allocate financial resources based on where companies and industries align when it comes to climate. Those on the side of the angels will be rewarded, and those on the dark side will be cut off financially.

“Direct monetary action, in the form of targeted asset purchases, quantitative easing programs, will reduce the cost of capital for green enterprise and innovation,” the writer advocates. “And it could also be tilted to increase the allocation of bonds of green companies, forming an effective tool to subsidize the cost of capital for ecologically minded enterprise.”

Needless to say, the future of oil and gas producers and marketers doesn’t look so good. Commercial banks that lend money to them would be hit with “additional capital requirements on activity that contributes to emissions.” Private equity money and the capital markets will also be closed to them. “A selective standalone program of corporate bond purchases, perhaps linked to companies’ emissions, would alter the behavior of emitters and investors. Just the signal of a policy shift would have a profound effect on the market. Investors will change their behavior long before any actual QE purchases take place.”

Now, who is the mystery writer of this op-ed piece? Is it some expert at one of the left-wing think tanks? Al Gore? Alexandria Ocasio-Cortez, perhaps? No, the writer is none other than Anne Richards, the chief executive of Fidelity International, the $706 billion asset manager and international arm of the giant and better-known Fidelity Investments, with more than $5 trillion under management, one of the largest financial firms on Earth.

Presumably, because Fidelity isn’t regulated by the Fed, Richards isn’t worried that a central bank will come around one fine day and decide that it doesn’t particularly like the way Fidelity manages its clients’ money or why it chooses this investment over that one. But, that’s the natural direction the Fed – or some other government entity – will take if Richards’ advice is followed.

Should the Fed then be allowed to tell people which bank or investment firm they should deposit their money in? If your bank lends money to Exxon or your IRA is invested with a company that owns or trades XOM stock or bonds (which just about all of them do), will you be banned or punished for doing business with them, even if you yourself don’t own any shares or bonds in that company? How far should this be allowed to go?

Of course, climate change is only one of the Fed’s newest mandates, racial inequity being the most prominent other one. So far, the Fed hasn’t had much to say about that area yet, although you can be sure it will be required to before too long.

Reuters reported last week that black employees represent 6.8% of the U.S. workforce at Goldman Sachs – about half their share of the entire American population – and only about 3% of its senior executive team, according to the bank’s 2020 sustainability report. Should the Fed penalize the bank for its hiring practices? If I were CEO David Solomon, I would address this fast before Jerome Powell does it for you.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.