Keep crash rules says Yellen as Draghi fears protectionist rise
Reforms put in place after the 2007 to 2009 crisis have strengthened the financial system without impeding economic growth, and any future changes should remain modest, Federal Reserve Chair Janet Yellen said yesterday.
The statement was her fullest defence yet of the rules put in place after the crisis.
Her comments, to the gathering of central bankers at the annual Jackson Hole summit in Wyoming in the US, sent the dollar to a three-week low against the euro, as she made no reference to US monetary policy in her speech.
European Central Bank president Mario Draghi said later at the summit that the ECB's quantitative easing monetary policy is successful and the Eurozone's economic recovery is taking hold, but patience is still needed for inflation to converge with the bank's target.
Mr Draghi said he was confident inflation would converge with the ECB's target of almost 2pc as output rises towards capacity.
He noted that slack in the labour market for now was keeping wage growth and ultimately inflation muted.
He said that open trade and global cooperation is vital to lift growth, warning against the threat of protectionism to the world economy.
Globalisation has left pockets of people behind, fostering distrust and ultimately threatening the sustainability of openness, a vital component of growth, he told the Jackson Hole summit.
"A turn towards protectionism would pose a serious risk for continued productivity growth and potential growth in the global economy," Mr Draghi said in a speech that did not touch on current monetary policy. "To foster a dynamic global economy we need to resist protectionist urges."
Meanwhile, investors were not expecting Ms Yellen to make a policy statement at Jackson Hole, but some market participants were hoping for some signal on the Fed's planned balance sheet reduction, if not on the outlook for rate hikes.
"The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth," the Fed chair said at the annual central bank research conference.
Some changes to individual regulations may be warranted, Ms Yellen said, specifically mentioning possible relaxation of the Volcker rule limit on banks' equity trading, and further relaxation of rules that apply to medium-sized and smaller banks.
Steps may be needed, she agreed, to improve liquidity in parts of the bond market, though that system remained "robust".
Overall, the Fed chair said, "any adjustment to the regulatory framework should be modest and preserve the increase in resilience" in a financial system she said is now better able to weather future shocks.
While she did not mention monetary policy in her prepared remarks, her comments amount to a strong message to Congress and a White House administration that has called for some rules included in the Dodd-Frank law and other regulations to be eased, arguing that they have slowed the economy.
President Donald Trump's nominee as vice chair of the Fed for regulatory issues, Randal Quarles, has been an advocate of such changes.
Ms Yellen said she and other current Fed members are not averse to revisiting how different regulations are working in practice, "and considering appropriate adjustments".
But she cautioned against putting the events of a decade ago too far in the rear view mirror.
"Already, for some, memories of this experience may be fading - memories of just how costly the financial crisis was," she told the audience of Fed staff and central bank colleagues from around the world.
The stability of the current system guards against a repeat, she said, while outside analysts have noted that it could also free central bankers to leave interest rates lower instead of worrying about the impact of those low rates on financial markets.
Ms Yellen said that overall, the regulatory change put banks, and the economy, back on their feet.
Post-crisis reforms "resulted in a return of lending growth and profitability among US banks," she said.
"Material adverse effects of capital regulation on broader measures of lending are not readily apparent." (Reuters)