Federal Reserve Chair Janet Yellen was in Congress on Tuesday for the first day of her semiannual testimony on monetary policy.
In her prepared speech to the Senate Banking Committee, Yellen said the central bank can continue to raise interest rates slowly although it would be “unwise” to wait too long.
“As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” Yellen said.
The Fed has indicated that there could be three rate increases in 2017, which would lift interest rates further away from the ultra-low floor that the financial crisis necessitated. Yellen declined to specify whether March was on the table for a rate hike.
The Fed’s outlook remains nimble and open to adapting to changing economic circumstances. One key thing the Fed is watching is the fiscal policy promised by the new administration, which could accelerate economic growth and inflation faster than expected.
“A few of my colleagues mentioned that in writing down those forecasts [for growth], they assumed there will be a mild fiscal stimulus,” Yellen said.
Yellen said while the US budget deficit is a longstanding issue, some fiscal policies being discussed could lift it even more.
The big issue put to Yellen was financial regulation, specifically the future of the Dodd-Frank financial reforms created after the Great Recession. This was Yellen’s first congressional testimony since President Donald Trump took office and started the process of scaling back reforms that the Fed helped to implement.
Yellen said easing the regulatory burden on banks was a “legitimate and important” goal.
Sen. Elizabeth Warren said Trump and his advisers were “wrong about every reason” to scrap Dodd-Frank regulations, adding that lending and profits have increased since their implementation in 2010.
Last week, Daniel Tarullo, chairman of the Board’s Committee on Supervision and Regulation responsible for regulating Wall Street banks, resigned. Yellen said a vice chair of supervision — a role the previous administration unsuccessfully filled — would take on Tarullo’s responsibilities.
“I do intend to complete my term as chair,” through February 2018, Yellen said in response to Sen. Richard Shelby’s question on her term.
There was also interest in the Fed’s timetable for unwinding its balance sheet, which it stoked to over $US4 trillion by buying bonds in response to the financial crisis. Yellen said she could not put a date to it, but expected the Fed to gradually unwind its balance sheet when the process of normalizing rates is well underway. The Fed will discuss its reinvestment policy in the coming months, Yellen said.
Yellen will testify in front of the House Financial Services Committee on Wednesday.
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