Member Spotlight

The Fed Needs More Flexibility to Act More Equitably

The Hill  | Wed, Jan 27, 2021

by Bianca Taylor


President Biden’s climate initiative boasts a new term “environmental justice,” which speaks to the disproportionate burden of pollution and climate catastrophes that are imposed on vulnerable populations. As the financial system comes to terms with climate risks, climate justice should also be considered.  

The Federal Reserve was founded in 1913 in response to perennial liquidity crises — financial emergencies that caused cash to be suddenly unavailable. In addition to being the lender of last resort, its role evolved into managing inflation, and over the last 10 years the focus has been on staving off deflation.   

Deflation is a situation whereby prices fall. It sounds like a shoppers dream, but remember that prices are only falling if demand is down, and demand usually falls in response to job losses or wage cuts. Think of the financial fallout in 2008 or the coronavirus crisis 2020. If the Fed had not stepped in with massive liquidity injections we would be in economic collapse. Deflation is caused by a shock to the economy such as a large percentage of homeowners defaulting on their mortgages or the coming environmental catastrophes caused by a hot planet. 

Preparing for climate catastrophes means many things: infrastructure that can withstand floods and agriculture that is drought resistant; and smarter insurance. It also means that central banks like the Fed need to implement new scenarios into their forecasts, and make adjustments. And we also need to think about the social justice implications of these new policies, including an upgrade to those already existing.

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