Garnet Capital Advisors Blog

Republican lawmakers questioned the Federal Reserve's independence and argued for big changes to be made in the operations of the central bank.

Republican lawmakers criticized the Federal Reserve's independence and financial regulations following the 2008 recession at last week's hearing of the Senate Banking Committee. The GOP lawmakers challenged Fed chairperson Janet Yellen on how the central bank has dealt with the economy over the past 10 years since the economic debacle crippled the nation.

While no major outbreaks occurred during the hearing, it was evident that there may be some conflict brewing.

GOP lawmakers grilled Yellen and vowed to push for significant changes in how the Fed operates independently as well as for reform in regulatory practices of the US banking system.

Following the recession nearly a decade ago, Republicans argued that zero interest rates and the employment of the 2010 Dodd-Frank - which the Trump administration is intent on revamping - have had no positive impact on the US economy.

Republicans promised to drive legislation that would put a cap on the Federal Reserve's independence by enforcing a specific formula that would determine interest rates and require the decisions made by the central bank regarding these rates to be audited by the Government Accountability Office.

Yellen was also criticized for the extremely slow pace at which the nation's economy has grown following the recession as a result of historically low interest rates and the onslaught of bond buying. She was also criticized for allowing post-crisis actions to sway too far in favor of stringent regulations. The vibe given off by Republicans at the hearing suggested that plans are in place to reduce these regulations now that they are in power following the election of President Trump.

Critics of the Fed argued that the extended low interest rate environment following the 2008 recession led to a much slower-than-necessary pace in growth.

Republicans stressed the need to reevaluate what is currently working and what isn't in terms of regulatory requirements and highlighted the need for financial regulation to be properly balanced between strengthening the financial system while encouraging a robust, growing economy.

In response, Yellen recommended that the focus of fiscal policy should inevitably be on long-term improvements as opposed to short-term growth. She also rejected the notion that regulations have weakened the financial system and instead argued that banks are now safer and lending remains profitable as a result of the central bank overlooking Wall Street in the wake of the financial crisis.

The Fed's chairperson also contested the argument that the Dodd-Frank Act has caused lenders across the country to be less competitive, and said that there is little to no evidence suggesting that small businesses are unable to get loans, which is a common underlying theme in the criticism of the Dodd-Frank. According to Yellen, there are few obstacles for US lenders to get their hands on fair market share.

Yellen told lawmakers that she agrees with the core principles of the administration's executive order, including improving the efficiency of regulations, revamping policies that might entice executives in the financial world to take potentially dangerous risks, and preventing bank bailouts at the expense of the taxpayer.

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