By Colleen M. Svelnis, J.D.
Federal Reserve Board Chair Janet Yellen appeared before the House Financial Services Committee to present her semi-annual report to Congress on the state of the U.S. economy and the nation’s financial welfare, and took questions from its members. The full committee hearing, “Monetary Policy and the State of the Economy,” was held on July 15, 2015. Yellen delivered the latest semi-annual Monetary Policy Report and touched upon the issue of the Fed’s transparency and accountability.
Opening statements. Representative Jeb Hensarling (R-Texas), Committee Chairman opened the hearing with an appeal for greater oversight of the Fed, saying that “evidence continues to mount that since the passage of Dodd-Frank, our nation is less stable, less prosperous, and less free. We continue to be mired in lackluster, halting economic growth.” Hensarling stated that “One way our economy could be healthier is for the Federal Reserve to be more predictable in the conduct of monetary policy…Today we’re left with so-called ‘forward guidance,’ which unfortunately remains somewhat amorphous, opaque, and improvisational.” He concluded that “[f]ollowing a monetary policy convention or rule of the Fed’s own choosing with the power to amend it or deviate from it at the Fed’s own choosing in no way interferes with the Fed’s monetary policy independence. Accountability and independence are not mutually exclusive concepts.”
Ranking member Rep. Maxine Waters (D-Calif) said in her opening statement that there has been improvement in the economy since the financial crisis. “Dodd-Frank made significant progress correcting the practices that helped lead to the crisis. It has delivered billions to victimized consumers, brought greater transparency to the once opaque banking practices that helped cause the crisis, and put in place clear rules of the road that foster stability in our financial system.”
However, she noted that improvements in the economy “do not paint a picture of an economy that has fully recovered” and said she hopes “the Board of Governors will continue its slow and cautious approach to raising interest rates. With inflation continuing to hover near zero, and numerous indicators of slack in the labor market, it is my hope that the Federal Reserve will give careful consideration to the impact of any potential interest rate increase on the middle class—and those communities that have yet to benefit from the economic recovery.”
Economic outlook. In her testimony Yellen discussed the current economic situation and outlook and monetary policy. According to Yellen, “prospects are favorable for further improvement in the U.S. labor market and the economy more broadly,” noting that the Federal Open Market Committee “expects U.S. GDP growth to strengthen over the remainder of this year and the unemployment rate to decline gradually.” With regard to labor market conditions, Yellen stated that they have improved substantially, but are not yet consistent with maximum employment.
The economy has made further progress toward the Fed’s objective of maximum employment with an unemployment rate at 5.3 percent, down from its peak of 10 percent in late 2009.
There were noticeable declines over the past year in the number of people suffering long-term unemployment and in the numbers working part time who would prefer full-time employment but continue to indicate that there is still some slack in labor markets
Wage growth continues to be relatively subdued.
Inflation has continued to run below the level that the FOMC judges to be most consistent over the longer run with the Fed’s statutory mandate to promote maximum employment and price stability.
Domestic spending and production softened notably during the first half of this year. Yellen attributed some of this to transitory factors, including unusually severe winter weather, labor disruptions at West Coast ports, and statistical noise.
Consumer spending has picked up, and sales of motor vehicles in May and June were strong, suggesting to Yellen that “many households have both the wherewithal and the confidence to purchase big ticket items.”
Homebuilding has picked up somewhat, though restrained by “limited availability of mortgage loans to many potential homebuyers.”
Yellen cited uncertainties that could affect growth in the U.S. economy, including foreign developments, which includes the financial conditions situation in Greece and China. Additionally, inflation continues to run below the FOMC’s two percent objective, but Yellen stated that she expects it to move gradually back toward the two percent objective over the “medium term.”
Monetary policy. The FOMC conducts policy to promote maximum employment and price stability, and Yellen stated that it has judged that a high degree of monetary policy accommodation remains appropriate. Accordingly, she said the Fed has continued to maintain the target range for the federal funds rate at 0 to 1/4 percent and have kept the Fed’s holdings of longer-term securities at their current elevated level “to help maintain accommodative financial conditions.”
“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy.” However, Yellen stated that “the stance of monetary policy will likely remain highly accommodative for quite some time after the first increase in the federal funds rate in order to support continued progress toward our objectives of maximum employment and 2 percent inflation.”
Fed transparency and accountability. Yellen also discussed recent examples of steps the Fed has taken to improve its public communications concerning monetary policy. These include:
semi-annual reports to Congress on monetary policy and economic developments;
FOMC issuing statements shortly after its meetings, as well as minutes of its meetings, with a full account of policy discussions and, eventually, complete meeting transcripts;
quarterly press conferences and the quarterly release of FOMC participants’ projections for economic growth, unemployment, inflation, and the appropriate path for the Committee’s interest rate target; and
FOMC adopting a statement in 2012 concerning its longer-run goals and monetary policy strategy that included a specific two percent longer-run objective for inflation and a commitment to follow a balanced approach in pursuing mandated goals.
Fed too opaque. Robert Hurt (R-Virginia) released a statement following the hearing noting his “serious concerns about the numerous Federal Reserve policies that make life more difficult for hardworking Americans.” Hurt said the Fed “is growing more powerful and more opaque.” He urged the Fed to adopt a more rules-based approach as opposed to operating under its current discretionary approach. “Doing so would make the Fed more transparent and help our economy return to a more normalized state-of-affairs. Historically, when the Fed has followed a rules-based approach, these periods have experienced strong economic performance and strong employment.”
Proposed legislation. Scott Tipton (R-Colo) told Yellen that community banks and credit unions are being “crushed” under broad Dodd-Frank regulations. Yellen told Tipton that the Fed is working to tailor its implementation of the Volcker Rule to minimize the impact on community banks. Tipton advocated for legislation he introduced, Taking Account of Institutions with Low Operation Risk (TAILOR) Act of 2015 (H.R. 2896), which would require federal regulatory agencies to tailor regulations to fit the business model and risk profile of institutions, instead of imposing less effective and more burdensome one-size-fits-all regulations (see Banking and Finance Law Daily, June 26, 2015). He said that tailored regulation is needed so small banks can continue to provide a vital service to communities in rural areas where access to capital continues to be a challenge to economic growth.
Scott Garrett (R-NJ) Chairman of the Capital Markets and Government Sponsored Enterprises Subcommittee has also authored two pieces of legislation (H.R. 113 and H.R. 2625) intended to open up the Fed’s opaque policy operations (see Banking and Finance Law Daily, June 4, 2015). Following the hearing, Garrett released the following statement: “The Federal Reserve has proven itself to be one of the most unaccountable and least transparent agencies in the federal government, and today's hearing did little to change that reality. From being unresponsive to subpoena requests from our Committee to dismissing concerns over serious problems in the fixed income markets, the Fed is the poster child of a shadow regulatory system that threatens taxpayers and our broader economy. It is an agency in dire need of change, and I look forward to continuing our Committee's efforts to bring real reforms to the Federal Reserve.”
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