At Jackson Hole, Yellen defends post-crisis regulations

Federal Reserve Chair Janet Yellen on Friday defended regulations adopted after the 2008 financial meltdown | © AFP/File | JIM WATSON
Federal Reserve Chair Janet Yellen on Friday defended regulations adopted after the 2008 financial meltdown | © AFP/File | JIM WATSON

by Douglas Gillison
Washington (AFP) | 25 August 2017 15:52

The remarks came during a much anticipated address at an annual economists’ symposium at Jackson Hole, Wyoming and followed efforts by Donald Trump’s administration to scale back legislation adopted to prevent another collapse in the financial system. The administration blames such regulations for stifling economic growth.

European Central Bank President Mario Draghi is also due to deliver remarks to the symposium Friday, but analysts said they expected both central bank chiefs to avoid policy pronouncements that could touch off market jitters.

Observers will be watching closely to see whether Draghi gives any sign of when the ECB may wind down a bond-buying stimulus program put in place after the crisis.

In her remarks, Yellen also offered scant clues as to whether the Fed may raise interest rates again this year, something increasingly in doubt.

She noted, however, that the world’s largest economy had made “substantial progress” toward reaching the Fed’s goals of full employment and price stability — circumstances which can call for higher rates.

“The evidence shows that reforms since the crisis have made the financial system substantially safer,” Yellen said in prepared remarks.

She noted that stress-testing had caused banks to increase their capital cushions in order to weather future shocks and had improved risk management. The quality of assets held by banks had risen, while dependence on short-term wholesale funding was down by half, she added.

– Lessons of the past –

While there was some contradictory evidence as to whether the reforms were hindering economic activity, she pointed to assessments which found “sizable net benefits to economic growth from higher capital standards.”

“The steps to improve the capital positions of banks promptly and significantly following the crisis… have resulted in a return of lending growth and profitability among US banks more quickly than among their global peers,” Yellen said.

She acknowledged, however, that lending may be less available to some borrowers with poor credit histories.

President Donald Trump has denounced the so-called the Dodd-Frank financial reforms — named after the two senators who originally sponsored the legislation — saying they hinder lending. He has directed the Treasury Department to review the legislation for possible changes.

Bank profits have been robust, however, and no substantive policy proposals have yet come forward.

Yellen warned that “sooner or later” markets would again experience “excessive optimism,” leveraging and other threats that could require new regulatory responses.

“We re-learned this lesson through the pain inflicted by the crisis,” Yellen said.

“We can never be sure that new crises will not occur,” she added.

But if governments are mindful of the dangers, “we have reason to hope that the financial system and economy will experience fewer crises and recover from any future crises more quickly.”

Yellen’s term is due to expire in February and Trump has said he may reappoint her, but he has also floated the possibility of naming current economic adviser Gary Cohn to replace her as Fed Chair.

For want of answers from Yellen on the direction of monetary policy, investors sent the dollar to three-week lows following the release of Yellen’s remarks.

The US currency had fallen nearly 0.5 percent against a basket of currencies toward 1500 GMT.

“The Fed chair urging small adjustments to financial regulation suggested any boost to the economy from the president’s agenda would be limited,” Joe Manimbo of Western Union Business Solutions said in a client note.

© 2017 AFP

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