The Dodd-Frank law and regulations put in place since the financial crisis have made the financial system “substantially safer,” Federal Reserve Chairwoman Janet Yellen said Friday in a ringing defense of the rules now under fire from President Donald Trump and J.P. Morgan CEO Jamie Dimon.
“Because of the reforms that strengthened our financial system, and with support from monetary and other policies, credit is available on good terms, and lending has advanced broadly in line with economic activity in recent years, contributing to today’s strong economy,” Yellen said in her highly anticipated speech at the Fed’s summer retreat in Jackson Hole.
Yellen steered clear from questions about current interest-rate policy.
“We can never be sure that new crises will not occur, but if we keep this lesson fresh in our memories–along with the painful cost that was exacted by the recent crisis–and act accordingly, we have reason to hope that the financial system and economy will experience fewer crises and recover from any future crisis more quickly, sparing households and businesses some of the pain they endured during the crisis that struck a decade ago,” she said.
The Dow Jones Industrial Average
extended gains after her remarks.
Fed watchers expect the central bank to announce a decision to start to shrink its massive balance sheet at its next meeting in mid-September and put off considering another interest-rate hike until December. Economists said before Yellen’s speech that if she stayed away from discussion of monetary policy would confirm the market’s expectations.
Vincent Reinhart, a former top Fed staffer and chief economist for Standish Mellon Management , said there was a dovish message implied in Yellen’s remarks.
If regulation has made the financial system safer, then Fed interest-rate policy can focus on the economy and not popping potential asset bubbles, he said.
That might keep the Fed from raising rates any more this year given the recent softness in inflation.
In her remarks, Yellen defended the new reforms that Republicans and bankers love to hate, including the Fed’s annual stress tests, the umbrella group of regulators called the Financial Stability Oversight Council and the new efforts to have banks write their own living wills to protect the U.S. taxpayers from a failing firm.
She said the Fed would continue to monitor reforms as many are fairly new.
Yellen pointed out that market measures and economic research support the notion that reforms have made the system safer. For instance, credit default swaps assign a low probability of distress at a large bank in the wake of the reforms, she noted.
While credit may be less available to some borrowers, Yellen quickly pointed out that mortgage borrowing was too easy for some households in the run-up to the financial crisis.
The Fed chairwoman said there was some truth to concerns of investors that regulations had reduced market liquidity especially in the bond market.
“While no single factor appears to be the predominant cause of the evolution of market liquidity, some regulations may be affecting market liquidity somewhat,” Yellen said.
She said there may be benefits to simplifying the Volcker rule, which limits proprietary trading by banking firms, but quickly said that only “modest” changes were needed.