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The U.S. Federal Reserve’s take on greening the economy: Not our job

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November 2, 2021

By Ann Saphir and Lindsay Dunsmuir

(Reuters) – The U.S. Federal Reserve trails other major central banks in tackling climate change, even as President Joe Biden pledges a “whole of government” approach and fights to salvage his ambitious climate agenda as global leaders meet in Glasgow to hash out responses to rising world temperatures.

In recent years the Fed has only begun to look at how changing weather patterns impact its ability to do its job, which includes safeguarding the financial system through bank regulation, and combating economic shocks through monetary policy.

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And while it is devoting more effort to studying climate-related impacts, it treats climate risk as just another element that affects the economic and financial landscape, like trade or childcare policy, rather than as anything the Fed might try to shape.

That puts it well behind its peers who are gearing up to buy green assets, crack down on fossil-fuel lending, and push companies toward lower-carbon choices.

The hesitance to prioritize action on climate risk at the world’s most powerful central bank will have consequences, analysts and activists say, not just for the U.S. economy but for a global financial system whose largest actors are in New York.

“If [the U.S.] are laggards, it won’t be good for our markets, it won’t be good for our companies,” said Sanjay Patnaik, a Brookings Institution fellow specializing in climate policies. “The U.S. doesn’t want to fall behind, or our financial system will be more vulnerable to climate risk.”

Fed policymakers could catch up relatively quickly “if they engage fully,” he said, particularly by implementing stress tests to gauge banks’ vulnerability to climate risks such as higher temperatures or exposure to loans financing fossil fuel. The Bank of England has already started such testing, with a view to using the results to nudge banks to be better prepared.

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Such tests could fall under the Fed’s own remit for financial stability and Fed officials have said they will explore the possibility. But, leery of blowback on what is a fraught U.S. political issue, they maintain it’s up to Congress, not them, to incentivize businesses to go green.

As Fed Chair Jerome Powell summed it up this summer: “We are not and we don’t seek to be climate policymakers as such.”

LETTING OTHERS LEAD

In the past year, the Bank of England and the European Central Bank have released comprehensive plans to help manage the transition to a greener economy, including using their asset-buying clout to selectively benefit less-polluting companies.

By contrast, the Fed, central bank to the largest greenhouse-gas producing country, remains stuck near the starting gate. It was the last major central bank to sign up to the Network for Greening the Financial System when it joined in December 2020, and has only just begun an effort to analyze financial-stability risks from climate change, but so far embracing no new policies to address it.

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“When I think about why are other banks ahead of us really – and they are – it’s because in those governments, they decided some years back that these are critical risks,” San Francisco Fed President Mary Daly said recently. Her bank has several economists leading the charge at the Fed on climate-change research.

Others such as the ECB and People’s Bank of China have started green bond programs — purchasing debt to finance environmentally friendly projects — to nurture a transition toward alternative energy. The Fed views such policies as beyond its economic and financial stability mandates.

Daly acknowledged that as fire seasons lengthen, droughts deepen, and severe weather disrupts more economic activity, the Fed may need to respond more assertively.

“If climate effects occur and they are bridling the growth of our economy and putting us below our potential, then it would be our job to lean against the risks,” she said, although she added that’s different to mitigating climate risk directly.

The Fed’s role is “not to even pull levers that would do that. It’s really to be students of it so we are well prepared,” Daly said.

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CALLS FOR ACTION

Last Friday, activists demonstrated at many of the regional Fed banks and at the Fed Board in Washington, demanding more action and the replacement of Powell with a leader more focused on climate. Powell awaits Biden’s decision on whether to nominate him for a second term, with critics seeing his assertion of climate change as a “longer-term issue” as a black mark against him.

“What we are pushing for is an aggressive level of regulation that we don’t think he has the appetite for,” said Kathleen Brophy, senior strategist at the Sunrise Project, a youth environmental activist group helping to organize the protests. “They have definitely stepped up on this issue for sure – but it doesn’t match the urgency.”

Others point out the Fed remains caught between an administration with a much bolder climate change agenda than in the Trump era and a Congress where Republicans and a few Democrats oppose action on climate change.

Even the small steps taken so far have drawn some rebukes.

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In a letter to Daly, Republican Senator Pat Toomey called the bank’s climate-change research “politically charged” and asked the Fed to abandon what he termed mission creep.

“Such activities are inconsistent with its statutory responsibilities; only Congress has the authority to reform the Federal Reserve or modify its mission,” Toomey said.

But while the Fed’s mandate is fairly narrow, its responsibilities are wide, and this is where it can take a stand on climate, analysts say.

“I think the Fed can and should be ahead, in the sense of that it’s their job to supervise banks,” said Paul Fisher, a former policymaker at the Bank of England who coordinated its climate initiatives. “Climate change is clearly a material threat to the banks and they have to supervise that… supervisors ought be getting on with this quietly in the background. Most of the banks recognize it’s a financial risk. It shouldn’t be that controversial.”

And the Fed is forging ahead on its exploratory path. In October it signed on to a report on climate-related financial risk with other U.S. regulators that, for the first time, framed global warming as a financial risk.

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“That’s the major contribution of the…report,” Patnaik said. “How do you get people to care about something? You tell them it’s a risk to their livelihood and their assets.”

(Reporting by Ann Saphir and Lindsay Dunsmuir; Editing by Dan Burns and Andrea Ricci)

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Wood’s ARK fund fails to join broad market rally as lockdown stocks slip

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November 30, 2021

By David Randall

NEW YORK (Reuters) – The broad market relief rally on Monday left many so-called stay-at-home stocks behind, dealing another blow to Cathie Wood’s ARK Innovation fund.

The $18.6 billion ARK Innovation fund, which outperformed all other U.S.-based equity funds last year due to its outsized holdings of stocks that rallied during the economic lockdowns, dropped 0.5% in morning trading Monday, well behind the 1% gain in the S&P 500.

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The benchmark index dropped nearly 2.3% Friday on news a new coronavirus variant, now known as Omicron, had been identified in southern Africa, spurring new travel restrictions worldwide. Yet global equity markets made up some of that lost ground Monday on reports the new variant may produce mild symptoms.

Signs Omicron will not deal a severe blow to the economy are prompting investors to remain in cyclical stocks, said Phil Orlando, chief equity market strategist at Federated Hermes.

“This is not February of 2020 when the world is about to shut down. If anything we think the economy will continue to improve from here,” he said.

ARK Innovation’s declines were widespread Monday, with 8 out of the fund’s 10 largest holdings down for the day. Telemedicine company Teladoc Health Inc, the fund’s second-largest holding, fell 5.1%, while streaming company Roku Inc shed 2.6% and Zoom Video Communications Inc lost 3.2%.

For the year, ARK Innovation is down 14%, while the benchmark S&P 500 is up 23.4%. That underperformance places ARK Innovation among the worst-performing mid-cap growth funds for the year to date, according to Morningstar. It remains among the top-performing funds over the last 5 years.

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Ark did not respond to a request to comment for this story.

(Reporting by David Randall; Editing by Mark Porter)

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Oil prices rise on bets OPEC+ will hold off output hike

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November 30, 2021

By Sonali Paul

MELBOURNE (Reuters) – Oil prices climbed on Tuesday, extending a rebound from last week’s plunge on growing expectations major producers would pause plans to add crude supply in January amid uncertainty over the severity of the Omicron coronavirus variant.

U.S. West Texas Intermediate (WTI) crude futures jumped 99 cents, or 1.4%, to $70.94 a barrel at 0105 GMT, adding to a 2.6% rise on Monday.

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Brent crude futures climbed 82 cents, or 1.1%, to $74.26 a barrel, after gaining 1% on Monday.

Oil plunged around 12% on Friday along with other markets on fears the heavily mutated Omicron would spark fresh lockdowns and dent global growth.

The World Health Organization said on Monday Omicron posed a very high risk of infection surges, and several countries stepped up travel curbs. It is still unclear how severe the new variant is and whether it can resist existing vaccines.

With the demand outlook under a cloud, expectations are growing that the Organization of the Petroleum Exporting countries, Russia and their allies, together called OPEC+, due to meet on Dec. 2 will put on hold plans to add 400,000 barrels per day (bpd) of supply in January.

“We think the group will lean towards pausing output hikes in light of the Omicron variant and the oil stockpile release by major oil consumers,” Commonwealth Bank commodities analyst Vivek Dhar said in a note.

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Pressure was already growing within OPEC+ to reconsider its supply plan after last week’s release of emergency crude reserves by the United States and other major oil-consuming nations to address soaring prices.

“Following the global strategic reserve releases and the announcement of dozens of countries restricting travel to and from South Africa and neighbouring nations, OPEC and its allies can easily justify an output halt or even a slight cut in production,” OANDA analyst Edward Moya said in a note.

Also weighing on the market is the prospect of a resumption of oil exports from Iran, following upbeat comments from diplomats as talks resumed on Monday between world powers and Iran on reviving a nuclear pact.

(Reporting by Sonali Paul. Editing by Gerry Doyle)

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Main IKEA retailer’s profits jump despite ‘unprecedented challenges’

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November 30, 2021

By Anna Ringstrom

STOCKHOLM (Reuters) – Ingka Group, the owner of most IKEA stores world-wide, reported on Tuesday a jump in annual profit on the back of record demand for home furnishing as people stay at home more due to the pandemic.

Despite more temporary store closures due to pandemic related restrictions than the year before, and product shortages due to the global supply chain crisis, operating profit in the 12 months through August was up 31% at 1.9 billion euros. Sales were up 6%, to above pre-pandemic levels, with online sales jumping to account for 30% of total sales, against 18% the year before.

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Compared to the pre-pandemic fiscal 2019, profit was still down, by 8%, due to high investment levels. Capital expenditure was up 52% on the year, at 3.2 billion euros, as Ingka accelerated investments in digitalisation, new inner-city store formats, existing stores, and distribution and delivery networks.

Chief Financial Officer Juvencio Maeztu told Reuters he expected sales to grow also in the current fiscal year, and profits to be at least as high as in the past year. Investment levels would probably remain at least as high as in the past year, he said.

“Our journey to create a better IKEA forges ahead in a world that faces unprecedented challenges. COVID-19 will continue to impact our business and the communities we are a part of,” the company said in a statement.

“The global supply and transport crisis will require a resilient, flexible response. Efforts across the value chain will continue to mitigate the challenges with product availability, inflation, prices of raw materials and transport that are expected to continue into FY22.”

Budget furniture brand IKEA operates through a franchise system, with Ingka the main franchisee to brand owner Inter IKEA with 392 stores including city stores, and 73 smaller store formats.

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Inter IKEA, which is in charge of design and supply, in the past year absorbed substantially higher costs for raw materials and transports, but has flagged it will raise prices to its retailers this year in the face of continued high supply related costs.

Ingka’s Maeztu said in the interview that he could not rule out that Ingka would also raise prices this year.

(Reporting by Anna Ringstrom; editing by Richard Pullin)

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