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Janet Yellen Argues For Fed Independence, Continued Interest Rate Hikes In University Of Michigan Appearance

Dustin Blitchok

Federal Reserve Chair Janet Yellen speaks during an appearance at the University of Michigan on Monday. "Our independence is under some threat," Yellen says of the Fed. Photos by Dustin Blitchok.

With a president in office eager to roll back financial regulations, Federal Reserve Chair Janet Yellen spoke in favor of safeguards in the banking system — and the Fed’s independence — in remarks at the University of Michigan on Monday.

Financial regulations instituted in the wake of the recession, such as higher capital requirements and annual stress tests for banks, have left the United States with a “safer and sounder” financial system, Yellen said. Since the financial crisis and the passage of Dodd-Frank banking rules, banks have been forced to hold more, higher-quality capital, operate with more liquidity and have become less reliant on “volatile” short-term funding, Yellen said. Arguments that regulations have stifled lending aren’t supported by objective data, Yellen said during Monday’s conversation with Susan M. Collins, the dean of the Gerald R. Ford School of Public Policy. Yellen also took questions from the audience and Twitter.

“Lending has grown in a very healthy way as the economy has recovered, and I think what we see are stronger banks that are better capitalized and in a better position to lend.”

‘Our Independence Is Under Some Threat’

The Federal Reserve system was designed to promote independence, Yellen said in Ann Arbor — something that pending legislation in the House of Representatives would change by allowing a government audit of the Fed.

“Our independence is under some threat,” Yellen said, telling the audience at U-M that the Fed’s ability to make decisions without short-term political pressure “is very important.” Yellen pointed out that the Fed is accountable to Congress, where she most recently testified Feb. 14.

President Donald Trump voiced his support during the 2016 campaign for what’s known as the “Audit the Fed” bill. The Federal Reserve Transparency Act of 2017 passed the House Committee On Oversight And Government Reform on March 28, and a similar bill has been introduced in the Senate.

An independent central bank results in a stronger economy, Yellen said.

“I always worry about threats to independence, and I think our macroeconomic performance is better — and the U.S. is well-served by — having a nonpartisan group shielded from short-term political pressures making these important decisions.”

Fed Chair Expects ‘Moderate’ Economic Growth

The U.S. economy “is pretty healthy,” and with unemployment at 4.5 percent and inflation hovering at around 2 percent, it has come a long way from the 2008 crash, Yellen said.

“Looking forward, I think the economy’s going to continue to grow at a moderate pace and our job is going to be to set monetary policy to sustain what we have achieved.”

While Yellen spoke strongly in favor of continued short-term interest rate hikes Monday, she offered no hint as to when the Fed might begin reducing the trillions in securities it amassed during the financial crisis.

Most research shows that what’s known as quantitative easing was a success, Yellen said, both in pushing down long-term interest rates and holding inflation closer to targets.

The risk in monetary policy now, Yellen said, lies in not raising the federal funds rate quickly enough.

“We don’t want to wait too long to have that happen,” she said. “If the economy overheats and inflation threatens to rise above the target, we don’t want to be in a position where we raise rates rapidly, which could conceivably cause another recession.”

The Federal Open Market Committee voted to hike rates for the first time this year on March 15, upping the federal funds rate by 0.25 percent to a range of 0.75–1 percent.

Worker Productivity May Pick Up, Yellen Says

The productivity growth of individual U.S. workers, at about .5 percent per year, “is very disappointing,” Yellen said Monday. The productivity number stood at about 2 percent in the 1970s. “My guess that [productivity] will pick up,” she said.

The lag in productivity may explain why, as the country recovered from the financial crisis, the economy’s growth rate didn’t rise in tandem with job creation numbers, Yellen said.

The underlying causes for drops in worker productivity could include slowing educational attainment in the United States, as well as a lack of “dynamism” in the business sector, Yellen said.

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Image Credit: Federal Reserve Chair Janet Yellen speaks during an appearance at the University of Michigan on Monday. "Our independence is under some threat," Yellen says of the Fed. Photos by Dustin Blitchok.

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