WASHINGTON – Federal Reserve Chair Janet Yellen came under fire Wednesday from House Republicans who charged that the central bank’s policies to promote low interest rates have not boosted economic growth and have left financial markets confused about the Fed’s next moves.
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said that the Fed and the Obama administration have failed to produce the strong growth the country has needed over the past seven years in the wake of the 2007-2009 recession.
“What is clear and verifiable is that this weak economy doesn’t work for millions of working Americans,” Hensarling told Yellen. “The Fed has been the facilitator and accommodator of the administration’s disastrous national debt policy and has regrettably lent its shrinking credibility to advancing the administration’s social agenda.”
While Republicans on the committee joined in Hensarling’s criticism, Democrats defended Yellen. They noted that the unemployment rate has fallen from 10 per cent to 4.7 per cent, and 14 million jobs have been created despite modest overall growth.
Yellen said the Fed has used the tools it has available to keep interest rates low as a way to bolster job creation.
Testifying for a second day before Congress, Yellen reiterated that the Fed plans to be very cautious in raising interest rates. She said the economy faces a mixed picture, with growth restrained by lacklustre investment spending but bolstered by a solid rebound in consumer spending.
Yellen said she was “very hopeful” that job growth, which slowed sharply in April and May, will rebound in coming months.
“There are some headwinds but we do have strengths. Consumer spending is particularly strong,” Yellen said. “I don’t want to send a message of pessimism about the economy and where we are going.”
The Fed left a key interest rate unchanged at a low level of 0.25 per cent to 0.5 per cent at its meeting last week. It was the fourth time it has passed up a chance to raise rates after nudging rates up by a quarter-point last December.
Hensarling and other Republicans used Yellen’s appearance to criticize the Fed’s current operations. Republicans in the House are pushing legislation that would require the central bank to adopt a formula using inflation and other measures to guide its decisions on interest rates.
Yellen has called such an approach unworkable. She has also voiced objections to another GOP proposal that would give congressional auditors the chance to review Fed decisions on interest-rate policies, saying that would impinge on the political independence the Fed needs to conduct monetary policy.
But Hensarling said the current confusion in markets about the central bank’s next move underscored the need for reforms.
“The Fed’s so-called forward guidance continues to provide little or no guidance to the rest of us,” he told Yellen.
Other Republican lawmakers questioned whether it was over-stepping its legal authority by paying interest on excess reserves that banks keep at the Fed that go beyond what Congress envisioned.
Yellen defended the Fed’s payments, saying the practice helped the Fed manage interest rate policies with the difference between the interest being paid and the Fed’s benchmark federal funds as “quite small.”
Some Republican lawmakers said they were concerned that the Fed could end up with losses on its massive bond holdings should interest rates start rising rapidly. The Fed expanded its balance sheet more than four-fold to $4.5 trillion currently by buying government bonds as a way to push long-term interest rates lower.
Yellen called the risks it faced in holding ultra-safe Treasury bonds very low.
Other Republican lawmakers raised questions about whether the Fed should stress test its own balance sheet in the same way that it conducts annual stress tests on the nation’s largest banks. Yellen said the Fed had conducted such a test.