Environmental Groups Urge Fed to End Energy Bond Buying
|07/30/2020 | 11:15am|
By Michael S. Derby
Environmental groups are pressing the Federal Reserve to end its purchases of energy sector corporate bonds as part of its broader effort to support financial markets as the U.S. navigates the severe economic stress of the coronavirus pandemic.
"Through these purchases, the [Federal Reserve] Board is potentially exposing the public to financial losses through credit risk, market risk, and operational risk due to exacerbation of the climate crisis," according to a letter signed by several groups and that will be sent to Federal Reserve Chairman Jerome Powell and John Williams, leader of the New York Fed.
The letter, signed by Amazon Watch, Greenpeace USA, League of Conservation Voters, Natural Resources Defense Council and Oxfam, will also be sent to several members of Congress.
The Fed is buying energy sectors bonds along with many other types of corporate securities in a facility joining with other emergency lending efforts. All are aimed at smoothing market functioning amid a turbulent economic environment and uncertain outlook for the economy.
On Wednesday, the Fed said in the policy statement released after its latest rate-setting Federal Open Market Committee meeting that "overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses."
But critics say there are two problems with the Fed buying energy sector bonds. One is that the sector faces considerable financial problems due to a broader move away from fossil fuels, of the sort that exposes the Fed to potential losses. Second, they believe the Fed should not buy securities that support an industry helping to fuel climate change by producing and burning fossil fuels.
Sarah Bloom Raskin, a former Fed governor and Treasury Department official in the Obama administration, said in a recent interview that the Fed shouldn't purchase energy sector bonds.
"When central banks indiscriminately inflate the value of these assets through corporate bond purchases, market mechanisms that would assist in the transition to a lower carbon economy are thwarted," Ms. Bloom Raskin, now a professor at Duke University, said.
Some Fed officials have weighed in on the energy bond purchases and have said their focus is on market functioning and avoiding picking winners and losers. If there are decisions to be made about environmental policy, that is a job for elected officials, not central bankers, they also said.
Some Fed officials have also been taking greater heed of climate change issues in their monetary policy deliberations, but it isn't a priority issue for the central bank, which instead has made it part of its bank oversight agenda.
Speaking Wednesday after the FOMC meeting, Chairman Powell appeared to play down concerns the Fed might lose money on the bonds it buys. "We can only create programs or facilities with broad-based eligibility to make loans to solvent entities, with the expectation that the loans will be repaid," he said.
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