YELLEN: The Fed is not subsidising big banks

Federal Reserve chair Janet Yellen testified on the economy before the House Financial Services Committee on Wednesday.

After her prepared remarks, Committee chair Jeb Hensarling (R-Texas) kicked off the Q&A session with a question about whether the Fed’s monetary policy approach is “traditional”.

Hensarling was concerned that the interest on excess reserves (IOER) for banks’ reserves is basically a subsidy for them.

Yellen responded that the (IOER) is widely used by central banks as a key policy tool, short-term rates cannot rise without it, and the financial crisis made a new approach necessary.

She also noted that the Fed has transferred $600 billion to Congress since it started its quantitative easing program in 2008, and so consumers are getting an actual subsidy, in fact.

Maxine Waters (D-California) wanted to know why the IOER, which pays “massive sums” to banks, is particularly important, and what possible alternative policy approaches were.

Yellen noted that it would be disruptive to the economy to remove the IOER, adding that as short-term rates rise, banks are also paying more to gain funding they rely on. And this is would be transferred to benefit savers through higher deposit rates.

Gwen Moore (D-Wisconsin) asked why no banking executives have gone to jail following the financial crisis.

Yellen noted that the criminal penalty matters lie with the Department of Justice, and the Fed is able to bar people it deems offenders from the banking industry.

On negative interest rates, Yellen noted that she was not aware of any legal limitations to implementing this. A 2010 staff memo reported by Bloomberg earlier this week stated that there were “several potentially substantial legal and practical constraints” to negative rates.

She also disagreed that the Fed’s stress test — which includes a scenario where three-month treasury bill yields are negative — is a way to gauge the impact of negative rates.

As expected, there were questions about how the recent market volatility would impact the Fed’s economic outlook.

Yellen said the volatility related to uncertainty about China’s exchange rate policy and oil prices. And while there are increased recession fears, the Fed has not seen a sharp dropoff in global or US economic growth. However, global market developments “bear close watching”.

She said she doesn’t foresee a scenario where a rate cut would be necessary, even as monetary policy is not on a set course.

And on a question about what policy tools the Fed has left, with rates so low and its balance sheet so huge, Yellen noted the path of interest rates, and that as market expectations shift with the economic reality, longer term rates move too.

On the labour market, Yellen was pressed several times about elevated unemployment rates among African Americans. She noted that the Fed does not have policy tools to target specific demographics even though it tracks them closely, and that all groups benefit on net when the labour market improves.

Sean Duffy (R-Wisconsin) asked again about the subpoena the Fed got over documents related to a leak of FOMC deliberations in a private newsletter, and he was frustrated that it’s been over a year since the documents were asked for. Yellen said she’d talked to committee chair Hensarling about her concerns with providing the transcripts, and would need more time to discuss the matter with her staff.

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