Janet Yellen got grilled about Fed leaks when she testified in front of Congress today

Janet yellenAP ImagesJanet Yellen

Fed Chair Janet Yellen gave her biannual update on monetary policy to the Financial Services Committee of the House of Representatives Wednesday.

After giving some prepared remarks, Yellen took questions from the committee.

Her prepared remarks hit the Fed website early Wednesday morning.

Yellen said that the economy is probably going to be ready for an interest rate hike before the end of the year.

Or, in Fedspeak: “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.”

In the most intense moment of an otherwise pretty lacklustre period of questioning, Congressman Sean Duffy asked Yellen about the Fed leak — an investigation into how confidential information from a Fed meeting ended up in a private investor newsletter before it was supposed to.

It got tense, as Congress has subpoenaed documents from the Fed and the Fed has not yet replied. Duffy asked her to tell him what authority the Fed has not to comply with a federal subpoena.

Yellen said that the Fed “has indicated that we fully intend to cooperate with you,” but have yet to send anything because it is an open investigation and the Inspector General has indicated that would compromise the investigation.

“It appears that you are, or the Fed is, the one jeopardizing this investigation,” said Duffy. “We have the right to these documents,” he said.

Here are some more notes from the testimony:

Congresswoman Maxine Waters asked Yellen about predatory lending against minorities, and asked her what she can do. While the Fed oversees the banks, who have to adhere to the Fair Lending Practices Act, Yellen said that it is something that Congress can do more about.

Later, Congresswoman Joyce Beatty asked Yellen to follow up on Waters’ question and specifically talk about inequality. She said that technological demands are upping the skills needed for certain jobs, therefore education is very important for combatting inequality. Policies on infrastructure and entrepreneurship also play a role, she said. She noted that there “isn’t much that the Fed can do to affect unemployment across groups” (meaning minority groups, which Congresswoman Beatty brought up). Therefore, the Fed has to focus on broadly making sure that jobs are available.

On forward guidance and the future of monetary policy, Congressman Bill Huizenga asked Yellen about the Taylor rule, and whether the Fed will ever rely on a rule-based interest rate policy. Yellen said she would resist any policy that relies on the readings of two variables. She said that the Fed needs flexibility, and she believes in a systematic policy, rather than a rule-based policy.

Congresswoman Gwyn Moore pressed Yellen more about this. Yellen said that the Fed is providing “a great deal of information to the public” through the Fed’s “dot plot.”

Did Dodd-Frank enshrine too big to fail? No, says Yellen. “It directed us to increase the safety and soundness” of big institutions.

Congressman Scott Garrett asked Yellen about the liquidity of the bond market. She said that it’s not clear whether there is or is not a problem. By some metrics there doesn’t seem to be a problem, by others, there does seem to be.

(In internet-speak, Yellen’s answer was ¯\_(ツ)_/¯.)

Congresswoman Carolyn Maloney asked Yellen about the risk to the US from turmoil in China and Greece, and how that might affect interest rate hikes. Yellen continued to say that the Fed’s trajectory will be data dependent. The Fed is aware of what’s going on abroad, but is more concerned about economic data at home.

As for how rate increases will go after the first hike, that’s data dependent, too.

Yellen also said that every FOMC meeting is “live,” so people should not expect that there will only be a rate increase at a meeting where there is a scheduled press conference afterward (September and December this year). If the Fed decides to raise rates in July or October, there will likely be a special, unscheduled press conference afterward.

Congressman Lacy Clay asked about the Community Reinvestment Act. Yellen said the Fed has been working to improve guidance for banks so that hopefully banks can do a better job of providing banking services for people in low-income areas. He also asked whether Dodd-Frank has hindered lending to would-be residential homebuyers. Yellen said… maybe, although it’s probably a good thing that lending standards are tighter than they were before the financial crisis.

Congresswoman Terri Sewell asked about employment and how monetary policy can help with wage growth and underemployment. Yellen said that she thinks “we are seeing at least some tentative signs” of higher wages. There are both cyclical and structural factors going on, Yellen said. In particular, she pointed out that productivity growth in recent years has been disappointing, and that might be affecting wage growth.

Sewell asked what Congress could do, and Yellen pointed to policies that emphasise education.

Congressman Stephen Fincher asked about the economic impact of Dodd-Frank. Yellen said that a group of central banks looked at this type of question, and the cost-benefit analysis shows that preventing financial crises saves more money than a slightly higher price capital costs.

In response to a question from Congressman Ed Royce, Yellen said that she would endorse GSE (government-sponsored enterprise, meaning Fannie Mae and Freddie Mac) reform from Congress.

Now a question about Puerto Rico! Royce asked whether the government should be involved with the negotiations between the Puerto Rican power authorities and their creditors. Yellen said that it isn’t a topic she has an opinion about, but the Fed is monitoring what is going on in Puerto Rico and how it is affecting larger markets, particularly the municipal credit market.

Congresswoman Ann Wagner asked Yellen about the national debt. Yellen said that she sees a long-term problem with the national debt. Eventually, we’ll be on an unsustainable debt path, which is mainly related to benefits programs like Social Security and Medicare. Not right now, but in the future the economy will start to see problems.

Congressman Andy Barr asked about the Fed’s threshold for raising rates, which was at one point 6.5%. The unemployment rate is far below that now. Yellen said that the threshold was a minimum — if the unemployment rate was higher than that, the Fed would not raise rates. However, the Fed said nothing about when it would raise rates.

In response to a question from Congressman Patrick Murphy about wage growth, Yellen said she sees more slack in the labour market than is reflected in the 5.3% unemployment rate, although there are also lags between a falling unemployment rate and rising wages.

Congressman Keith Rothfus asked Yellen to read a GDP chart for him.

In a response to a question from Congressman Denny Heck, Yellen said that the Fed is looking to minimise the regulatory burden on community banks.

Heck also asked her, “what keeps you up at night?” with respect to the economy. Yellen said she’s focused on the economy’s strength.

Asked about regulatory burden on banks by congressman Keith Ellison, Yellen said there has been an increase, but the Fed is focused on keeping the system healthy so there will be a continued flow of credit.

Yellen also said that she is worried about the levels of student debt, although education is “critically important.” Students “need good information about programs and their success rates.”

And that’s a wrap! Yellen will testify before the Senate Banking Committee Thursday.

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