WASHINGTON — Federal Reserve Board Chair Janet Yellen faced a largely hostile audience during her testimony before the House Financial Services Committee on Wednesday, with Republicans and Democrats alike grilling her on a range of banking issues.
The hearing marked the second time Yellen has testified specifically on regulatory issues, separate from her mandatory appearances to discuss monetary policy.
During the hearing, lawmakers sharply criticized Yellen on a host of topics, including the recent enforcement action against Wells Fargo, proposals to radically change the stress test regime, a regulation to limit banks involvement in the commodities market and whether the central bank is acting in a political fashion.
Following are some highlights.
Republicans Are Painting the Fed as Politically Motivated
Several GOP members took up the mantle of Republican presidential nominee Donald Trump's repeated assertions — most recently during Monday's first televised debate — that the Fed was keeping interest rates low in order to help Democratic nominee Hillary Clinton's campaign.
Rep. Scott Garrett, R-N.J., led the charge, arguing that Yellen's repeated contact with political appointees in the Obama administration amounted to an "unacceptable cozy relationship" and one that flies in the face of the Fed's purported independence.
He also suggested that Fed Gov. Lael Brianard — whose name has been circulated as a potential pick for Treasury Secretary if Clinton were to win the White House — used her position on the Federal Open Market Committee to push to keep interest rates low in order to help Clinton win the election.
"It was reported earlier this year the Fed Governor Lael Brainard contributed a maximum amount to the Hillary Clinton campaign," Garrett said. "Because of the appearance of conflict and impropriety … has Gov. Brainard ever offered to recuse herself from voting at the FOMC?"
Yellen answered that Brainard had not offered to recuse herself, nor has Yellen asked her to.
"What's important to me is whether or not in our collective decision-making, I see politics being brought to bear in reasoning about our decision," Yellen said. "I have never seen that on the part of any of my colleagues. I don't think that there is a conflict of interest there."
Rep. Joyce Beatty, D-Ohio, retorted that it would make perfect sense that Yellen or any other Fed chair would meet with members of the administration — just as members of Congress meet with leaders of the Federal Reserve. She then pointed to recent revelations that Fed Chairman Arthur Burns was pressured by President Richard Nixon to engage in expansionary monetary policies in the lead-up to the 1972 election.
Yellen said she has never experienced any similar pressure from the Obama administration.
"I have never been pressured in any way by the administration," Yellen said. "My experience has been that it greatly respects the Fed's independence to make decisions."
Democrats Want Wells Fargo Broken Up
Several Democrats on the committee questioned Yellen about the conduct and supervision of Wells Fargo, which has been embroiled in recent weeks by a scandal involving thousands of employees using customers' private information to open fraudulent accounts in order to meet sales quotas.
Rep. Brad Sherman, D-Calif., pointedly called for Yellen to break up Wells, saying any bank that is too big to know whether thousands of its employees are engaged in fraud — as it claims — then it should be dismantled.
"I say 'too big to fail' is too big to manage," Sherman said. "So my question for you is: Will you seriously consider using your authority, as I think you're required to review and consider using your authority, will you at least seriously consider breaking up Wells Fargo?"
Yellen reiterated a position she made last week that she believes it's "possible, even though it's extremely challenging, for organizations to comply with the law."
Sherman fired back: "Two million phony accounts not detected by the regulators. Break them up."
He wasn't the only Democrat to question the regulators' treatment of Wells in the wake of the scandal. Rep. Stephen Lynch, D-Mass., questioned whether any bank would ever be forced to admit wrongdoing if Wells was able to avoid doing so as part of its settlement with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency.
"I think there's value in just getting after them," Lynch said. "Make their life hell."
An Early Attack on the Fed's Commodity Proposal
The Fed last week issued a proposal that would set out significantly higher risk-based capital requirements for banks involved in certain physical commodities trading and related activities, as well as setting some maximum exposure limits and reporting requirements.
The plan, which builds on a 2014 advance notice of proposed rulemaking, argues that banks' exposures to environmental liabilities associated with a catastrophic event like the 2010 Deepwater Horizon oil spill could potentially create systemic risks if it put the financial health of the bank in jeopardy.
But several Republicans questioned how they can calculate higher capital levels — in some cases a 1,250% risk weight — when there are no obvious examples of such an exposure ever creating a material risk to a financial institution.
That line of reasoning — that the Fed's proposal is based on the supposition of what might happen if there is a catastrophic event, rather than an assessment that such a risk is material or likely — will probably emerge as a leading criticism of the plan from the banking industry as their comments are submitted.
"What past environmental catastrophes have posed a problem for financial holding companies?" asked Rep. Randy Neugebauer, R-Texas. "I can't think of an event that happened that impacted those financial holding companies."
But Yellen said the agency is not bound only to defend against catastrophes that have already happened, but can use its imagination and foresight in assessing risks before they happen.
"It's not a question of just going back through history to see what has happened in the past," Yellen said. "It's forward-looking concern that the permissible activities could pose risks."
Eliminating the Qualitative Stress Test for Midsized Banks Is Popular
Fed Gov. Daniel Tarullo — who oversees the Fed's supervisory committee — Monday unveiled sweeping changes to the way the agency envisions its stress testing program evolving in coming years.
Among those changes are a recalculated "stress capital buffer" and incorporation of the Fed's surcharge for the largest and most globally active banks into the post-stress minimums. The Fed also proposed to eliminate the qualitative test for all but roughly a dozen of the largest of the 50 or so banks that must undertake the stress testing exercise.
In his opening statement, Chairman Jeb Hensarling, R-Texas, offered faint praise for that latter change — which the Fed has proposed for incorporation into the 2017 stress testing cycle — calling it "wise, and a very small step in the right direction."
The Lockhart Nomination Will Be a Flashpoint for Fed Diversity
Several Democrats pointedly asked Yellen to encourage the Federal Reserve Bank of Atlanta to select a racial minority as a replacement for its president, Dennis Lockhart, who is slated to retire at the end of February. A grassroots political action campaign known as Fed Up has called on the regional bank's selection committee to choose a person of color as his replacement, noting that minority communities are currently and historically underrepresented among the Fed's leadership.
Rep. David Scott, D-Ga. — perhaps overestimating Yellen's ability to influence the regional bank's selection process — asked Yellen to "take this opportunity to make history" by selecting an African-American to replace Lockhart.
"You have an opportunity to do something very significant," Scott said. "There has never been an African-American regional Fed president. I'm asking you [to] take this opportunity to make history. We have many eminently qualified African-Americans who can do this."
Beatty echoed Scott's sentiment, and further suggested that the Fed should adopt a principle — which she suggested be called the "Beatty Rule" — whereby whenever a high-profile leadership position like the one Lockhart is vacating comes available, the search committee "actually identify and interview at least one person who is a minority" as part of the selection process.
Yellen answered that she has instituted a number of initiatives to increase diversity within the Fed system and that she "very much hope[s] we can see greater diversity in the FOMC."