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Fed's Brainard Says Climate Change Might Have Implications for Neutral Interest Rate

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11/08/2019 | 12:13pm EST

By Paul Kiernan

WASHINGTON -- Federal Reserve governor Lael Brainard said the central bank is ramping up its efforts to understand the implications of climate change for monetary policy and noted that the phenomenon may have consequences for interest rates.

"To the extent that climate change and the associated policy responses affect productivity and long-run economic growth, there may be implications for the long-run neutral level of the real interest rate," Ms. Brainard said in remarks prepared for delivery Friday at a San Francisco Fed conference on the economics of climate change. She was referring to the estimated level of interest rates, adjusted for inflation, that neither stimulates nor slows economic growth.

Ms. Brainard cited research showing that more-frequent heat waves could affect economic output and labor productivity. She said rising insurance premiums and increased spending on climate-change adaptations -- such as air conditioning in places where it wasn't previously needed, or elevating homes in areas that become more prone to flooding -- "will have implications for economic activity and inflation."

The chair of the Fed's committee on financial stability, Ms. Brainard also highlighted potential vulnerabilities in the financial system associated with climate change and weather-related natural disasters that might become more common or intense.

"If prices of properties do not accurately reflect climate-related risks, a sudden correction could result in losses to financial institutions, which in turn reduce lending in the economy," she said. "Banks also need to manage risks surrounding potential loan losses resulting from business interruptions and bankruptcies associated with natural disasters."

Write to Paul Kiernan at paul.kiernan@wsj.com

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