WASHINGTON – Senate Democrats on Tuesday enlisted Janet Yellen, the Federal Reserve chairwoman, as an expert witness against Republican plans to roll back post-crisis financial regulations.
In testimony before the Senate Banking Committee, Yellen said repeatedly that the new safeguards were effective and that regulation was not impeding economic growth.
Sen. Sherrod Brown of Ohio, the ranking Democrat on the committee, asked Yellen whether regulation had reduced the risk of financial crises. “I believe the financial system is much more resilient than it was,” she said.
Are businesses unable to get loans? No, Yellen responded.
Are banks unable to compete with foreign rivals? No, she said.
Are consumers better protected against predation? Yes, she said.
Brown closed with a flourish as he summarized the testimony, “Steps taken after the crisis made our economy stronger, our financial system more stable, our banks better capitalized and our consumers better protected.”
The performance drew muted criticism from Senate Republicans, who pressed Yellen to say that the post-crisis pendulum had swung too far in the direction of regulation. In part, the tempered tone of their questions reflected the reality that Republicans are in power and free to move forward with plans to reduce regulation.
President Donald Trump has criticized the post-crisis overhaul of financial regulation as a “disaster.” He signed an executive order this month instructing the Treasury Department to assess the effect of those regulations. Republicans also are considering new legislation.
The new chairman of the banking committee, Sen. Mike Crapo, R-Idaho, said he hoped the Fed would cooperate with Trump in its efforts to reduce financial regulation.
“It is time to reassess what is working and what is not,” Crapo said. “Financial regulation should strike a proper balance between the need for a safe and sound financial system and the need to promote a vibrant, growing economy.”
Sen. Patrick J. Toomey, R-Pa., went further, expressing the hope that the Fed would “refrain from issuing major new regulations” until Trump had the chance to name his people to senior roles at the central bank, including the position of vice chairman for regulation, created after the crisis to oversee rule-making.
Yellen was invited to Capitol Hill to deliver a biannual report on monetary policy to the Senate Banking Committee. And she found time to tell the committee that the Fed remained pleased with the performance of the economy and expected to continue raising its benchmark interest rate, although she dodged questions about the timing.
The unemployment rate was little changed during the last year, standing at 4.8 percent in January, even as the economy added an average of 190,000 jobs a month during the second half of 2016, and an additional 227,000 jobs last month. That indicates people are returning to the workforce.
Inflation also showed signs of rising to a healthier level. Prices increased by 1.6 percent during 2016, a percentage point more than in the previous year, although that is still below the Fed’s preferred 2 percent annual pace.
Yellen demurred when asked directly whether the Fed planned to raise rates at its next policymaking meeting, in March. But she reiterated the Fed’s December prediction of three increases in 2017, raising the Fed’s benchmark rate from its current range, 0.5 percent to 0.75 percent, to a range of 1.25 percent to 1.5 percent.
“It is our expectation that rate increases this year will be appropriate,” she said.
Other officials have echoed that view. Charles Evans, president of the Federal Reserve Bank of Chicago, told reporters last week that the expectation of three increases “is not unreasonable.”
The comments are particularly noteworthy because Evans remains one of the strongest proponents of raising rates slowly to support continued growth.
Investors continue to predict that the Fed will not raise rates until its June meeting, although the chance of an earlier increase rose after Yellen’s testimony.
Yellen also offered Congress the broad advice that changes in fiscal policy should focus on long-term improvements in productivity rather than short-term growth.
Here, too, she dodged questions about the details. When one senator asked for her views on a particular tax proposal, Yellen smiled and said, “I’m not going to tell you that.”
Changes in fiscal policy have the potential to scramble the Fed’s economic outlook. Trump has called for measures to stimulate growth, like tax cuts and infrastructure spending.
Yellen and other Fed officials have suggested that the Federal Reserve would seek to offset such measures by raising rates more quickly because the Fed judges the economy to be growing at roughly the maximum sustainable pace already. But she reiterated that before acting, the Fed would see what Congress may do.
On regulation, however, Yellen got down to basics.
Gary Cohn, the president’s chief economic adviser and a former Goldman Sachs executive, said this month that bank lending had been constrained by changes requiring banks to raise a larger share of funds from investors rather than lenders. Such funding protects a bank in the event of losses, because it need not be repaid.
Cohn described this regulation incorrectly, saying banks were required to “hoard” capital. In fact, capital is funding; it is not held or hoarded.
Under questioning by Sen. Elizabeth Warren, D-Mass., Yellen defended the importance of capital standards and she corrected Cohn.
“It’s not a requirement that they stick it in a safe and it can’t be used,” she said.
Yellen agreed with Senate Republicans that government should draw a greater distinction between the regulation of big banks and smaller ones.
Sen. John Kennedy, R-La., secured an acknowledgment from Yellen that community banks were not responsible for the 2008 financial crisis, then pressed her to explain why they had been subjected to any additional regulation.
In response to a separate question about possible remedies, Yellen suggested that Congress might exempt smaller banks from requirements that are rarely relevant but still impose significant administrative costs, like limits on executive compensation.
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