WASHINGTON — Federal Reserve Chair Janet Yellen on Wednesday touted the vast improvements to the safety and soundness of the banking sector since the financial crisis, saying the changes — particularly to supervision — represent a "quantum leap" from the pre-crisis regulatory regime.
Yellen, speaking after the central bank's regular meeting of the Federal Open Market Committee, said that the quality and quantity of capital, liquidity and resilience of banks — especially the largest and most systemically risky banks — have improved dramatically in the past eight years.
"We have much more capital, higher-quality capital, liquidity in the banking system," Yellen said. "We've made very meaningful changes in our supervision. Ffor example, the stress tests … [represent] a quantum leap in terms of the quality of supervision we're providing, especially at the largest firms."
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President Obama on Monday defended his administration's record on financial reform and the performance of officials he put in charge of implementing it, responding to critics in both parties who have claimed that the financial system is less safe since the 2008 financial crisis.
March 7 -
Federal Reserve Board Chair Janet Yellen faced tough questions Wednesday by House Financial Services Committee lawmakers over the central bank's regulatory treatment of big banks.
February 10 -
The Federal Open Market Committee Wednesday voted to raise federal interest rates from nearly zero for the first time since 2008, meeting market expectations but ushering in a new and uncertain normal for the banking industry.
December 16
Yellen specifically cited regulations like the recently proposed Total Loss Absorbing Capacity rule and the forthcoming review of the largest banks' so-called living wills as examples of changes that will end the "too big to fail" phenomenon. The Fed and the Federal Deposit Insurance Corp. have made "very substantial progress" in their evaluations of the living wills, which are expected to be released in the coming weeks, she said.
Yellen's comments came a week after she and other financial regulators met President Obama at the White House to discuss progress in reforming the financial sector. After that meeting, Obama said he was proud of the work that had been done by regulators but decried the "cynicism" among the public that nothing has been done since the crisis to improve bank safety.
The president's remarks came a few weeks after Neel Kashkari, the newly appointed president of the Federal Reserve Bank of Minneapolis and erstwhile overseer of the 2008 Troubled Asset Relief Program, said that he believed the biggest banks must be dismantled because attempts to reduce their risk have failed. Kashkari announced a yearlong initiative at the bank to examine how to end "too big to fail."
Speaking on Wednesday, Yellen said that she and other regulators must continue to note improvements that have been made since the passage of the Dodd-Frank Act in 2010.
"I think it's our job, as we make these improvements, to explain what we're doing and to try to educate the public about what has happened," Yellen said. "It's certainly part of my responsibility to explain that to the American people. "
Yellen's press conference came as the FOMC concluded its most recent meeting. Committee members appeared to settle on a lower target interest rate for 2016 than its December projections, with nine members predicting a rate between 0.75% and 1% by yearend and another seven members preferring a rate between 1% and 1.5%. By contrast, only four members projected a 2016 rate below 1% in December.
"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run," the FOMC said in its statement.
The Fed's decision to keep rates static appears to confirm a prevailing view in the market that the volatility that has roiled global markets since the beginning of the year — spurred in part by weakness in emerging markets, a strong dollar and persistently low energy commodity prices — has dimmed the outlook for strong economic growth in the near term, and with it the Fed's likelihood of raising rates at a steady pace.
The committee revised down its median projection for Personal Consumption Expenditure inflation — that is, inflation most felt by households — from 1.6% in December to 1.2%, a fairly dramatic change. The rate for "core" PCE inflation — that is, excluding food and energy prices — was unchanged at 1.6%.
The committee's median projections for unemployment in 2017 and 2018 were revised down slightly, however, suggesting that the Fed expects that the labor market will continue to strengthen over the medium term.
