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| Mrs. Yellen |
Janet Yellen may not be contemplating retirement, but she may well linger a moment longer over her evening cocktail as she assesses the last two years of reporting to Congress, as the Federal Reserve Board Chair is required to do semiannually, and as she did last week.
In 2015, I wrote how she got roughed up by Congressman Jeb Hensarling and Sean Duffy, who had accused her of a coverup of a meeting with investors, that ultimately went nowhere.
Now, in 2017, with again that long drive up the Hill, she removed the dovish outlook that she had previously taken, in favor of one that was more hawkish due to the improved gain in jobs; and a growing U.S. economy, that would put the Fed in line with its historic goal of improving conditions for employment, and meeting inflation goals, generally seen as 2 percent.
The reliably reticent Mrs. Yellen, whose data driven foundation, had led her, to the consternation of some, to be ever cautious as she increased interest rates, must have seemed chipper that she was able to see the path ahead, that so many desired. After all there was sustained job growth, with 190,000 jobs added in the second half of 2016, and 227,000 expected the first quarter of this year.
On the first day, at the Senate, she said that the Fed was open to increasing interest rates further, but emphasized, “As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.”
While she would not commit to a March increase, most observers have said they are waiting, and watching, for the new Trump administration fiscal policy. But, as Business Insider noted, “The Fed's outlook remains nimble and open to adapting to changing economic circumstances.”
Critics point out, however, despite that, the often disjointed, and even cumbersome efforts, from the Trump White House, (in other policy areas), seen over the last four weeks, make them fearful. This despite an overall favorable disposition to a businessmen being president.
With Yellen’s appearance before the House, aggression, again ruled the day, “After eight years, there is zero evidence that zero interest rates and a bloated Fed balance sheet lead to a healthy economy,” House Financial Services Chairman Jeb Hensarling (R-Tex.) told Yellen.
His voice leads that of many Republicans who feel that the Fed’s direction, under Yelen, and their holding reserves of $4.65 trillion, including $2.5 trillion in treasuries and $1.8 trillion in mortgage-related securities, has been unproductive. Along with others in the the GOP, Hensarling feels that they need to be shrunk.
When she was asked when the Fed would begin reducing the size of its more than $4 trillion balance sheet, which has grown with the Fed’s successive rounds of bond purchases aimed at lowering long term interest rates, Yellen said that Fed officials do not feel the bond holdings should be reduced until they have raised its benchmark rate, currently at a range of 0.5 percent to 0.75 percent, to a more normal level of 1.24 percent to 1.5 percent which would give the Feds room to lower the rate if the economy was given an unexpected jolt.
In the anti-regulatory atmosphere, that is as much a part of Washington, now as partisanship, Yellen has remained open to change, including Dodd-Frank, saying, in part, easing regulatory burden was a “legitimate and important goal,”
As The Washington Post reported, “Hensarling indicated that he would be pushing his legislation to limit the Fed’s independence by requiring the central bank to follow a numerical formula for setting interest rates and by subjecting the Fed’s interest rate decisions to audit by the Government Accountability Office, the auditing arm of Congress.”
Standing her ground, Yellen said she is opposed to both of his proposals, arguing that although the Fed can consider various formulas during its discussions on interest rates, “no single formula offers the flexibility the Fed needs in making decisions,” and that using them “would result in poor economic performance."
“I think central banks all over the world have recognized that an independent central bank that can focus on the long-term health of the economy . . . gives rise to a better economic environment,” Yellen said. She stressed that, “I see well-capitalized banks that are regarded as safe, strong and sound.”
While the GOP is focusing on profitability versus regulation, the identifying the very role of a central bank is up for dibs. But, most economists feel that a strong central bank is associated with lowered, and more stable, rates of inflation. Moreover, for people like Hensarling, there is no real relationship between central bank independence and true economic activity; and no correlation with average unemployment, the volume of unemployment, and average growth in the GDP, or its volatility, to name but a few.
In the absence of a financial policy, from Trump, many critics of the GOP, feel that there is an overzealous quest for deregulation, that ignores basic economic principles.
Repeating the remarks that she delivered on Tuesday before the Senate Banking Committee, Yellen, at the House, indicated that the Fed, which has “implemented two modest quarter-point interest rate hikes over the past two years, is likely to accelerate increases this year if the labor market remains healthy and inflation continues to move toward the Fed’s 2 percent target.”
On the the button issue of bank regulation, Yellen agreed that Dodd-Frank regulations on the nation’s community banks “were burdensome and needed to be modified. But she argued that the requirements imposed on the nation’s largest banks in terms of increasing the amount of capital they need to hold, and in subjecting them to annual stress tests, had made the financial system safer.” In fact, only 4 percent of banks in a national survey said they had trouble obtaining loans, and indeed these were smaller banks.
GOP lawmakers have urged the chair to abandon any new rules, or regulations, in their anti-regulatory mode, until President Trump filled two vacant slots and one pending. But Yellen has said that any new regional heads could review any regulations, and voice objections, or request changes.
U.S. bankers and their lobbyists have devoted much of their recent attention to the never-filled Fed role of vice chairman for supervision, which was created by Dodd-Frank. Yellen laid out some of her plans for how she’ll treat a Trump appointee to that role, including allowing the person to represent the Fed in international talks over bank rules.
Trump, who has called Dodd-Frank a “disaster,” signed an executive order earlier this month instructing the Treasury Department to examine financial rules and file a report on its findings within 120 days. In response, Yellen has said, I certainly do agree with the core principles," Yellen said. “They enunciate very important goals for our financial system."
She also told Bloomberg News, that “she looks forward to working with Treasury Secretary Steven Mnuchin on the review. And, in her Tuesday speech she said that she agrees with the principles outlined in the administration’s executive order, which include preventing taxpayer bailouts of banks, making regulations more efficient and targeting government policies that might encourage financial executives to take undue risks.”
Her answer, or course is diplomatic, but also reveals the diplomatic posture needed in Washington, even though, there may be howls for her head on a platter. But, with no Salome in sight, Yellen seems safe enough.
During the campaign, Trump said that she should be “ashamed” of the way she ran the Fed. Yellen’s four year term ends in January of 2018, and she told Sen. Lamar Alexander, that she intended to finish that term.
Republicans are eager to place their own people in two vacant positions, and one pending, that of Daniel Tarullo, the Fed’s leading official on bank regulations, who recently announced that he will step down in April. The seven member board could easily be influenced, many say, by the upcoming administrations views. Anticipation builds.
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