August 29, 2017

Breakingviews: Yellen Sets Out Her Stall for Trump

by Breakingviews

U.S. Federal Reserve Chair Janet Yellen has set out her stall for Donald Trump. In what may be her last set-piece speech at the annual Jackson Hole central bankers’ confab, she defended tighter regulation since the financial crisis 10 years ago and called for continued U.S. leadership in global forums. The president wants to unwind the reforms, which could be a factor as he considers who should next lead the central bank.The Fed chief reiterated her support for the post-crisis Dodd-Frank reforms, saying changes such as forcing banks to hold more capital have “substantially boosted resilience” without hurting economic growth. She said the creation of the Financial Stability Oversight Council, made up of the heads of America’s watchdogs, marked an important step in ensuring risky activities don’t fall through the cracks. She also said U.S. leadership of global efforts to coordinate regulation through the Basel Committee and the Financial Stability Board have made the system safer.

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Yellen said it’s worth reviewing regulations – for example to help smaller banks lend to small businesses – but any adjustments should be “modest.” Yet Trump pledged to “do a big number” on Dodd-Frank and seeks an “America first” approach to international bodies. Trump also ordered FSOC to put a hold on designating any more non-banks as systemically risky.

Trump has however, said he might reappoint Yellen when her term as chair expires in February. The Fed has hiked interest rates twice this year, but she has been cautious about the central bank’s path to normalization. The Fed first raised rates in 2015 after having a near-zero rate policy in place since 2008. It waited another year before increasing rates again in 2016.

The president is also considering his National Economic Council Director Gary Cohn for the top Fed role. The Financial Times on Friday quoted the former Goldman Sachs president as saying the administration “must do better” in condemning neo-Nazis and other racist groups – remarks that could cool Trump’s enthusiasm for Cohn, at least temporarily.

Yellen steered clear of monetary policy comments in her speech, instead laying out a measured, footnoted philosophy on regulation. That’s not Trump’s style – and Cohn is more in favor of deregulation – but he likes her dovish approach on interest rates. The Fed chair has given the president plenty to think about.

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