WASHINGTON (CN) – Defending the testing and regulation of banks, Federal Reserve Chairwoman Janet Yellen told Congress on Wednesday that inflation must meet agency standards before the agency can raise interest rates.
Yellen testified before the House Financial Services Committee in the place of the vice chair for supervision, a still-vacant, presidentially appointed position created under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
This vacancy concerned some members of the committee, who suggested the Federal Reserve could benefit from an employee dedicated to supervising the board.
With interest rates held at or near zero since 2008, Yellen said the board would consider raising them as early as December.
Raising rates is a “live possibility,” Yellen said, explaining that the reluctance behind the hike stems from low energy prices that have helped to keep inflation below the 2 percent threshold the Federal Reserve Board would like to see.
“It’s been a long time that interest rates have been at zero, but markets and the public should be thinking about the entire path of policy rates over time,” Yellen told the committee.
The Fed expects that path to continue very gradually, but that “of course will depend very much on the actual performance of the economy,” Yellen added.
Some have been critical of the board’s interest-rate policy, including Republican Presidential candidate Donald Trump who recently suggested Yellen has kept the rates low at the Obama administration’s request.
But Democrats on the committee cautioned Yellen to hold off on raising the rate until the economy is more stable, possibly even into the spring.
“If you hit the brake too soon and say, whoops, I’ve got to hit the accelerator, you don’t have any gas,” Rep. Brad Sherman, D-Calif., said.
Yellen reiterated the increase, when it happens, will likely be gradual.
As for specific Federal Reserve policy, Yellen praised the board’s policy of tailoring stress tests of banks to the size of the institution.
The country’s largest banks are required to undergo rigorous testing and adhere to “more stringent” testing, capital and liquidity requirements, Yellen said.
Though the Fed tries to tailor the tests imposed on smaller institutions to limit their financial burden, it has to operate within the Dodd-Frank requirements, Yellen added.
Yellen told the committee the Federal Reserve is “very receptive and actively engaged” in lifting some of the regulations governing smaller banks, which some members, especially those representing rural districts, said are too burdensome.
The chairwoman added that such a move “isn’t a must have.”
Rep. John Carney, D-Del., voiced his suspicion “that some of those [banks] that are much smaller than the top five or six don’t have any systematic risks associated with them and shouldn’t’ then be subject to some of these more expensive [tests].”
But Rep. Jeb Hensarling, R-Texas, criticized the opacity of stress tests and other policies of the Federal Reserve. He questioned how people can be confident in the financial system without a full view of the Federal Reserve’s actions.
Yellen defended the Federal Reserve, arguing it does “a great deal” to explain its methods in testing banks.
Hensarling responded that “detail may be in the eye of the beholder because members of Congress have no insight.”
An unintentional moment of Federal Reserve transparency also came up at the hearing – a 2012 leak of confidential Federal Reserve information. The agency recently complied with a congressional subpoena to supply documents related to this breach and the Federal Reserve’s response to it.
Rep. Sean Duffy, R-Wis., used all of his five-minute allotment for questioning to press Yellen on the Federal Reserve’s response to the leak.
Questioning the Federal Reserve policy that requires the Federal Open Market Committee’s general counsel to review a breach before sending to the inspector general, Duffy argued that it could constitute a conflict of interest, given the counsel could be the source of the leak.
Duffy also asked Yellen if it was true the White House and Treasury Department were notified of the leak before Congress, as the Wall Street Journal reported. Yellen denied this, and insisted the Federal Reserve is committed to protecting confidential information.
Despite the concerns of some members of the committee, Yellen insisted the Federal Reserve has contributed to crafting a more stable financial climate in the United States.
“We are trying to diminish the risks of another financial crisis in a number of ways,” Yellen said. “The most important I would say is to improve the resilience of all of the systemically important firms so that they have much greater ability to survive adverse conditions and continue to meet the credit needs of the economy.”
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