On eve of summit, U.S. draws climate roadmap for finance

From: POLITICO's Morning Money - Thursday Oct 21,2021 12:03 pm

Oct 21, 2021

By Kate Davidson and Aubree Eliza Weaver

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Quick Fix

Confronting climate risk: It’s a big day for folks following the intersection of climate change and financial regulation: The Financial Stability Oversight Council, a panel of top U.S. regulators, is set to release its much-anticipated report this afternoon on how to mitigate climate risks in the financial sector.

With the Biden administration’s climate agenda in doubt on Capitol Hill, policy advocates are looking to the White House to flex its administrative muscle and show the rest of the world the U.S. is serious about reining in the risks posed by climate change. That’s especially important now, as the president prepares to head to Glasgow next weekend for the U.N. Climate Change Conference without a legislative victory to show on the crisis yet.

The report will mark the first time the U.S. regulators collectively and formally cite climate change as a systemic risk to the financial system, an important signal to other countries that the Biden administration hopes to bring along at the talks.

The U.S. is already playing catch-up. U.K. financial regulators this week announced they would begin taking steps to start requiring companies to publish their plans for transitioning to net-zero emissions. And the European Central Bank has begun stress-testing banks for climate risks.

A key question is whether the FSOC will go beyond the strong conclusions in last week’s National Economic Council report on the risks of climate change to financial firms and commit to specific policy actions, such as new capital rules or direct limits on fossil fuel financing, within a set timeframe.

Policy advocates are keeping their expectations in check, banking on short-term prescriptions focused on data gathering, analysis and disclosure. That’s in part because the report is expected to be a consensus document, crafted to ensure buy-in from all of the council’s regulators, rather than one that reflects the potentially stronger views of the majority.

Administration officials have sought to reassure climate groups that the report is just a first step to lay the groundwork for its regulatory agenda.

“That’s fine,” said Lena Moffitt, campaigns manager at Evergreen Action. “But if this is just a first step, we think it is incumbent on them to outline those next steps and to include hard and fast timelines for when they are going to take meaningful action.”

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Driving the Day

Fed governor Chris Waller speaks on the economy at 9 a.m. … Senate Banking Committee holds a hearing on how private equity landlords are changing the housing market at 10 a.m. … House Financial Services Committee holds a hearing at 10 a.m. on the need for more federal investments in affordable housing.

YOU’VE GOT MAIL — The Consumer Financial Protection Bureau is expected to issue a letter to tech firms, including Facebook, Google and Amazon, seeking answers to more than 50 questions from each company about how they use consumer data, a source tells MM.

TOOMEY DROPS HOUSING BILL — Sen. Pat Toomey (R.-Pa.) plans to introduce a bill today to bar Fannie and Freddie from purchasing loans secured by investment properties amid rising concern about investors crowding individuals out of homeownership (the subject of Thursday’s Senate Banking Committee hearing). The Biden administration recently lifted Trump-era restrictions on those purchases.

DEMOCRATS WEIGH SLASHING HOUSING AID IN RECONCILIATION BILL — From our Katy O’Donnell and Megan Cassella: “Democrats are considering cutting housing funding in President Joe Biden's social spending plan to $100 billion, roughly a third of the initial amount proposed as they try to lower the cost of the bill, congressional aides said.” That’s fueling resentment among progressives who are battling efforts to scale back the size of the bill.

“Public housing repairs — which were given $80 billion in the original proposal — would still receive a cash infusion under the revised framework, but $75 billion in new rental assistance through Section 8 housing vouchers was at risk of being eliminated, according to people familiar with the talks who requested anonymity,” they write.

SPEAKING OF RECONCILIATION — WSJ’s Andy Duehren, Richard Rubin and Kristina Peterson: “Sen. Kyrsten Sinema’s opposition to tax increases is causing Senate Democrats to look at financing their social policy and climate package without raising tax rates on businesses, high-income individuals or capital gains, according to people familiar with the matter.

“The Arizona Democrat has told lobbyists that she is opposed to any increase in those rates, according to a person familiar with her remarks, but her stance is now pushing Democrats to more seriously plan for a bill that doesn’t include those major revenue increases.”

A message from the American Bankers Association Foundation:

Fly Around

FED BEIGE BOOK: GROWTH SLOWED IN RECENT MONTHS — WSJ’s David Harrison: “U.S. economic growth slowed to a modest to moderate rate this fall as firms confronted supply-chain disruptions, elevated prices, a shortage of available workers and fears around the Delta variant of Covid-19, the Federal Reserve said Wednesday. Many businesses said they expected higher prices and supply shortages to last another year or so.”

The survey also said that vaccine mandates are contributing to labor market turnover — Bloomberg’s Reade Pickert: “Employers across the U.S. are struggling to attract and retain talent, and in some areas, vaccine mandates have made it even more challenging to hold onto workers, the Federal Reserve’s Beige Book said Wednesday. The central bank said vaccine mandates were ‘widely cited’ as contributing to high labor turnover, along with child-care issues and Covid-related absences.”

FED’S QUARLES FEARS PREMATURE RESPONSE TO INFLATION: Federal Reserve Governor Randal Quarles said Wednesday that it's probably too soon for the central bank to tap the brakes on the economy to try to avert potential problems from inflation, our Zach Warmbrodt reports.

Quarles said at the annual Milken Institute Global Conference in Los Angeles that the Fed faces a situation where strong demand supported by unprecedented levels of fiscal stimulus is outstripping "temporarily interrupted" supply, leading to rising prices. But he warned that intervening might not have the desired impact.

"To act now to try to constrain that demand, to bring it more into line with the current levels of supply and thus constrain inflation, I think we'd be acting prematurely," Quarles said. "We expect that the fundamental productive capacity of the economy -- the ability of the economy to satisfy that level of demand without inflation -- is still there. And so if we began reducing demand now, given the lags with which monetary policy acts, you could see demand constricting just as supply is increasing, and we could undershoot our inflation target by the time that our actions now would have that effect."

But Quarles said the Fed faces a dilemma. The flip side is that supply bottlenecks continue longer than expected — as they are already — as additional fiscal stimulus reaches the economy. An extended bout of inflation in that scenario might start to impact the decision-making of households and businesses —"un-anchoring" inflation expectations, in the parlance of economists. "To me, the fundamental question we face at the Fed right now is, how long is too long?" he said.

QUARLES ALSO SAYS HE DOESN’T SEE RATIONALE FOR CENTRAL BANK DIGITAL CURRENCY — Quarles, via Reuters: “Until somebody answers me the question why, I don't understand why we would devote the enormous amount of resources and the technological risk and the significant disruption to the current operation of the financial system that would come from the central bank saying we are going to provide this digital currency.”

BOSTON FED WILL NOT RELEASE DOCUMENTS ON ITS FORMER PRESIDENT’S TRADES — Reuters’ Howard Schneider: “The Boston Federal Reserve will not release documents that could show whether its former president vetted a series of personal investments last year with its ethics officer, a spokesman for the regional Fed bank said, a key point in an ongoing ethics controversy at the U.S. central bank. Eric Rosengren, along with Dallas Fed President Robert Kaplan, stepped down after details of their trading activities in 2020 were reported in the media last month, raising questions about whether Fed rules on policymakers' financial investments are strict enough given their market-sensitive roles.”

BITCOIN TOPS $66K — AP’s Stan Choe: “Bitcoin stormed above $66,000 for the first time on Wednesday, riding a wave of excitement about how the financial establishment is increasingly accepting the digital currency’s rise.”

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Markets

STOCKS END HIGHER WITH S&P 500 NEAR RECORD — AP’s Damian J. Troise: “Stocks ended higher on Wall Street Wednesday, bringing the S&P 500 to the brink of another record high. The benchmark index climbed 0.4 percent for its sixth gain in a row.”

WALL STREET DOUBLES DOWN ON THE GREAT INFLATION TRADE — Bloomberg: “Money managers are hiking bets on the great inflation trade of 2021, as the biggest risk to price stability in more than a decade rocks corporate boardrooms and Wall Street trading floors. With supply chains and labor markets tightening anew, the latest Bank of America Corp. survey shows investors have rarely been this overweight assets that gain from rising prices or higher bond yields.”

A message from the American Bankers Association Foundation:

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Get Smart About Credit is just one way America’s banks are empowering young adults with the financial knowledge they need to be successful in life. To date, the ABA Foundation’s financial education programs—led by banks of all sizes in every state—have reached over 11 million young people nationwide and Get Smart About Credit alone has touched more than 150,000 students both in and out of the classroom.

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