Coverage: Yellen defends current banking regulation

Federal Reserve Board chair Janet Yellen went before the Senate Banking Committee on Tuesday and defending current banking regulations, stating that they are not inhibiting economic growth.

Binyamin Appelbaum of The New York Times had the news:

Senator Sherrod Brown of Ohio, the ranking Democrat on the committee, asked Ms. 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, Ms. Yellen responded.

Are banks unable to compete with foreign rivals? No, she said.

Are consumers better protected against predation? Yes, she said.

Mr. Brown closed with a flourish, declaring that he would summarize 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 Ms. 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.

Patti Domm of CNBC.com reported that bond prices fell due to Yellen’s testimony:

Bonds sold off and their yields jumped as traders reacted to the Fed chair’s vague statement that the central bank will likely need to raise rates at an upcoming meeting and that “waiting too long for accommodation would be unwise.”

“She’s less cautious, that’s for sure,” said John Briggs, head of strategy at RBS. He said her comments and tone reinforced the Fed’s forecast for three rate hikes, even if she did not exactly speak to it.

“Normally, Yellen talks about downside risks,” said Briggs. “She just talked about the upside risk.”

Stephen Stanley, chief economist at Amherst Pierpont, noted Yellen dropped concerns about the economy in her comments.

“This turns on its head the default stance of Yellen and the doves for the last several years. … What she said today is that the economy currently justifies further rate hikes unless something changes. I view that as a low bar to rate moves. And note that she uses the phrase ‘at our upcoming meetings,’ which very clearly puts a March rate move on the table,” he wrote.

Heather Long of CNNMoney.com reported that the first interest rate hike may come as soon as March:

The Fed currently predicts three rate hikes in 2017. That said, the Fed began 2016 predicting four rate hikes and ended up doing only one.

Wall Street is currently betting only about a 20% chance of a March rate hike. Boockvar thinks Yellen wants to get that probability to at least 50%.

Uncertainty about President Trump is the key reason Wall Street doesn’t believe the Fed will hike rates in March. Yellen admitted she’s not sure what Trump and the Republican-led Congress will do so the Fed is in wait and see mode.

“Some of the policies being discussed may raise deficits,” she told the senators. “It’s not a simple matter to evaluate.”

She went on to say the Fed didn’t have “enough clarity” yet on what policies will actually be enacted.