Federal Reserve Chair Janet Yellen is in the hot seat on Capitol Hill Wednesday, Nov. 4 as she testifies before the House Financial Services committee. (AP)
Federal Reserve Chair Janet Yellen on Wednesday defended the central bank's tighter oversight of the financial system as essential for a stronger banking system during a contentious hearing on Capitol Hill.
Yellen's appearance was itself a source of controversy. The sweeping reform of the financial system passed in 2010, known as the Dodd-Frank Act, mandated that the White House appoint a vice chairman of supervision at the Fed to oversee its expanded regulatory responsibilities. However, the Obama administration has yet to name someone for the job, so Yellen was filling in to testify before the House Financial Services committee.
Rep. Jeb Hensarling of Texas, who heads the committee, struck a combative tone from the start of the hearing, criticizing Yellen for the lack of transparency in developing the new regulations, many of which were required under Dodd-Frank.
"Simply put, the Fed must not be allowed to shield its vast regulatory activities from the American people and congressional oversight by improperly cloaking them behind its traditional monetary policy independence," Hensarling said.
The reforms implemented by the central bank include raising capital requirements for the nation's biggest biggest banks, conducting annual stress tests on banks and identifying other large, systemically important financial institutions that should be monitored. On Wednesday, Yellen said many of the largest institutions are healthier and have more stable funding sources than they did before the 2008 financial crisis. However, she said many still have "substantial compliance and risk-management issues."
The hearing, which was slated to last three hours, often delved into the weeds of banking regulation, but the esoteric subject matter did not prevent lawmakers on both sides of the aisle from asking pointed questions.
"Has the Fed crossed the line from being regulator to manager?" Hersaling asked, suggesting Fed officials had inappropriately attended board meetings of the banks they oversee.
"I love the way chairs never give answers," Democratic Rep. Michael Capuano of Massachusetts said after asking about unfinished regulations that would change incentive compensation for employees at financial firms.
One lawmaker even invoked higher powers in urging Yellen not to raise the Fed's target interest rate, its chief instrument for steering the American economy. The central bank's next policy meeting is in December.
"God's plan is not for things to rise in the autumn. That's why we call it fall," said Rep. Brad Sherman, a Democrat from California. "God's plan is that things rise in the spring. So if you want to be good with the Almighty, you might want to delay until May."
Yellen said she believes the economy is "performing well," adding that risks to the American recovery from global turmoil have diminished. Meanwhile, the job market is gaining strength. If the economy continues to chug along as expected, Yellen said Fed officials will debate whether to raise rates for the first time in nearly a decade.
Republican Rep. Sean Duffy of Wisconsin also questioned Yellen on the details of a 2012 leak of confidential information from the central bank to a financial consulting firm. The Fed last week turned over nearly 4,000 pages of documents to lawmakers after months of resistance.
"Maintaining the confidentiality of sensitive information is for me a very high priority,” Yellen said.
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Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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