Federal Reserve Chair Janet Yellen had a clear message for the Trump administration in what could be her final Jackson Hole speech: Undoing the hard work of reforming the financial system after the financial crisis could have dangerous consequences.
Yellen has previously defended the post-2008 meltdown Dodd-Frank legislation which the Fed, under her leadership, has been charged with implementing. She credits the reforms with greatly strengthening the US financial system by forcing banks to raise capital and shed riskier assets.
In her keynote address at the high-profile conference in the Grand Teton mountains of Wyoming, Yellen was not holding back — in a way that potentially suggests she is not holding her breath for a reappointment from Donald Trump. Yellen’s term as Fed chair expires in February, and Trump is widely expected to nominate Gary Cohn, ex-president of Goldman Sachs and head of the president’s National Economic Council, to replace her.
“Fed Chair Janet Yellen’s passionate defence of the post-crisis tightening of financial regulation isn’t going to go down particularly well at the White House,” wrote Paul Ashworth, economist at Capital Economics, in a research note following the speech. “Donald Trump has made rolling back regulation the centre-piece of his presidency.”
Cohn himself has argued the new regulations have been harmful to bank lending and the economy.
“The biggest thing we have to fix is that we have to get the United States banking system working again” Cohn said in January. “We need to get capital available to small and medium size businesses and for entrepreneurs. Today banks do not lend money to companies. Banks are forced to hoard money because they are force to hoard capital and they can’t take any risks. We need to get banks back in the lending business, that’s our number one objective.”
Yellen, in diplomatic terms, essentially argued Cohn and Trump are dead wrong.
Yellen points to research that found “sizable net benefits to economic growth from higher capital standards.”
“The steps to improve the capital positions of banks promptly and significantly following the crisis, beginning with the 2009 Supervisory Capital Assessment Program, have resulted in a return of lending growth and profitability among U.S. banks more quickly than among their global peers,” she said.
For this reason, Yellen concludes, “any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years.”
It’s not a message the Trump team is likely to heed, but it’s certainly one that cements Yellen’s own personal exit strategy.