Though the Trump train is still chugging ahead with promised infrastructure spending and decreased regulatory oversight, some caution to the risks associated with deregulation particularly talks to roll back the provisions of Dodd-Frank. Federal Reserve Chair Janet Yellen sparred with House Republicans recently over the value of financial regulation and the effectiveness of monetary policy, creating quite a testy confrontation between the central bank and Capitol Hill.
During the House Financial Services Committee hearing, Republicans grilled Yellen over four hours, repeatedly challenging her handling of the economy and her inability to force a market correction. In addition, House Republicans hammered the excessive regulation that have burdened American Business, whilst criticizing her leadership in the implementation of Dodd-Frank. As House Financial Services Chairman Jeb Hensarling, R-Texas, told Yellen, “after eight years there is zero evidence that zero interest rates and a bloated Fed balance sheet lead to a healthy economy.’ Later emphasizing investor sentiment following the Trump election by noting that “clearly, American have a newfound expectation that our economy will grow healthier with different policies coming out of Washington.”
However, while Yellen acknowledged that economic growth has been “quite disappointing,” she refused to admit fault noting that the Fed’s efforts had contributed to strong job growth since the financial crisis, defending her position on regulation following the financial crisis. Rep. Hensarling followed with an even stronger attack against the Federal Reserve, noting that “after eight years of the largest monetary policy stimulus in our history and the most unconventional monetary policy in our history, Americans recently received disappointing economic news yet again,” as the economy grew a measly 1.6% in 2016.”
GOP lawmakers further Hensarling rhetoric noting that the Fed’s ultra-low interest rates and quantitative easing in the wake of the 2007-2009 recession had left the economy growing at the slowest pace for any economic recovery in the post-war period. As a result, Rep. Hensarling indicated that he would work to limit the Federal Reserve’s independence by forcing them to follow a numerical formula in calculating interest rate formulas, as well as subjecting their decisions to congressional audits by the Government Accountability Office.
Nonetheless, Yellen argued against these proposals, stating that the Fed considers a plethora of formals in compromising their interest rate projections, as no one formula retains the flexibility needed to accurately gauge an effective interest rate. Yet that begs the question as to what formulas are they using to decide an effective interest rate, and what justification do they have when considering various formulas. This, in turn, creates a shroud of secrecy, unregulated by the government to act in its own accord without governmental intervention. Yellen would go on to tell the committee, “I think central banks all over the world have recognized that an independent central bank that can focus on the long-term health of the economy … gives rise to a better economic environment.”
As the hearing pressed on, Yellen simply restated her testimony before the Senate Banking Committee when addressing monetary policy. Yellen noted that the Fed will likely increase its rate hikes following a healthy job market and graduated increase in inflation expectation. Yet on the topic of bank deregulation, ellen appeared divided in two, aggressing at one point with the GOP that Dodd-Frank has posed a cumbersome regulatory burden for small community banks; but, later noted that the regulations on large banks, that being the annual stress tests and strict capital requirements, have made the financial system safer. Though there isn’t quite an easy answer to the nature of financial regulation, with Democrats urging House members to keep the provision of the bill, while Republicans offered to repeal its burdensome rules; the bill has created an indecisive political climate that fails to work on a bipartisan front.
As a result, the Trump administration may receive greater difficulty when trying to push forward his deregulatory agenda, as gridlocks between the Fed’s Janet Yellen and Democrats may prove quite cumbersome when trying to move forward. Nonetheless, I intend for the Trump administration to successfully dismantle portions of the bill that have cost financial institutions a great deal in operating expenses, thereby freeing cash flow to be invested elsewhere.