On October 16, the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency jointly rescinded their interagency principles for managing climate-related financial risks at large banking institutions. Jai Kedia and Jerome Famularo from Cato’s Center for Monetary and Financial Alternatives argue that these principles extended well beyond the Fed’s narrow statutory mandate and risked diverting the central bank from its core monetary policy responsibilities. 

In their latest piece, Kedia and Famularo point out unintended consequences of the climate principles, such as higher regulatory compliance costs that could lead to more expensive or reduced lending. The vague language of the principles left financial institutions facing unclear expectations and the threat of increasingly stringent regulation.

This is a rare instance of regulators narrowing their scope, a positive development, given that the Fed’s mandate is limited to maintaining stable inflation and maximum employment. Rescinding climate rules is a promising start, but the Fed should take bolder steps and sharpen its focus even further.

To set up an interview, please reach out to Madison: mmiller@​cato.​org.