WASHINGTON Federal Reserve Chair Janet Yellen found herself on the defensive Tuesday as Sen. Elizabeth Warren, D-Mass., cast doubt on a top staff member of the Fed, suggesting he was not committed to implementing the Dodd-Frank Act.
During an unusually aggressive bout of questioning for Yellen, particularly from a lawmaker generally regarded as supportive of the Fed chair, Warren questioned comments made by Fed General Counsel Scott Alvarez last year raising concerns with aspects of the financial reform law.
"The Fed is our first line of defense against another financial crisis, and the Fed's general counsel, or anyone at the Fed staff, should not be picking and choosing which rules to enforce based on their personal views," Warren said during a Senate Banking Committee hearing, the first of two this week in which Yellen will testify on monetary policy matters.
"I urge you to carefully review this issue and to assess whether the leadership of the Fed staff is on the same page as the Federal Reserve Board."
At issue were remarks Alvarez made in November to the American Bar Association in which he criticized a provision of Dodd-Frank that forced banks to push out certain swap activities into affiliates.
"You can tell it was written at 2:30 in the morning," Alvarez said, according to Warren. "And so it needs to be, I think, revised just to make sense of it."
A month later, the swaps provision was mostly repealed when large banks successfully added a provision to a must-pass spending bill. That incident angered Warren and other progressives, who said it was the equivalent of "blowing a hole in" the Dodd-Frank Act.
Alvarez also reportedly criticized a separate provision meant to address conflicts of interest at credit rating agencies, suggesting it didn't work as intended.
During the hearing, Warren repeatedly asked whether Yellen agreed with Alvarez's views.
"Do these specific criticisms of Dodd-Frank rules that govern the largest institutions in this country reflect your criticisms or the criticisms of the Fed board?" Warren asked.
Yellen did not offer a defense of Alvarez or Fed staff in general, instead emphasizing that Dodd-Frank is a "very important piece of legislation that has provided a roadmap for us to put in place regulation."
The response did not satisfy Warren, who said, "I just need a yes or no here: do his criticisms reflect your criticisms?"
Yellen eventually agreed that neither she nor the Fed were as openly critical of the swaps push-out rule as Alvarez had apparently been.
"The Fed's position and my position is that we're able to work very constructively within the framework of Dodd-Frank to tailor rules that are appropriate for the institutions we supervise, and we're not seeking to change the rules," she said.
The exchange was notable for several reasons, including Warren's ongoing ire at those who would significantly change Dodd-Frank. It also is unusual for a lawmaker to so publicly criticize a staff member of the Fed, and for doubts about that member to go unaddressed by the head of the central bank.
After the hearing, Yellen expressed faith in Alvarez in a written statement.
"My colleagues and I depend, with confidence, on Scott Alvarez' expert advice and counsel," Yellen said. "He is a dedicated public servant who is committed to thoughtful public policy."
Warren was also one of Yellen's champions during the lead-up to her confirmation last year. Yet the Massachusetts Democrat has raised concerns about the Fed's independence from big-bank influence.
She took New York Fed President William Dudley to task late last year over allegations that the regional bank supervisor responsible for overseeing the largest banks had been "captured" by those institutions and was unable or unwilling to vigorously enforce the law.
Sen. Jack Reed, D-R.I., returned to that subject again on Tuesday, asking what changes Yellen is making to ensure "greater accountability for the New York Fed."
Yellen responded that the Fed is reviewing its large-bank supervision program, the results of which are due soon.
Dennis Kelleher, president of the public interest group Better Markets, said that Warren was giving voice to a concern that has been growing in recent years over the power that career staff have in crafting regulatory policy at the Fed, which lacks some of the transparency and accountability measures present at other federal agencies. Alvarez in particular, Kelleher said, has a very influential role at the Fed.
"It is impossible to overstate the enormous influence and power of the Fed's senior staff," Kelleher said. "Alvarez is often referred to as the 'eighth governor' [of the Fed board]. He is literally at the juncture of every significant policy decision made by the Fed because they all have to go through legal."
Kelleher said the solution he advocates is to increase transparency at the Fed so that staff decisions and actions are more clearly delineated and documented. That interest is increasingly shared by Republicans and Democrats alike, Kelleher said, and he expects that a coalition could craft legislation or otherwise apply pressure necessary to open op the Fed's traditionally opaque processes.
"The Fed has no idea how precarious and fragile a position they are in," Kelleher said. "It is not hard to see a substantial majority consensus form on the need to reform the processes at the Fed on the regulatory side."
Overall, the hearing touched on several other topics, including cybersecurity. Asked what risks cyber threats pose to the system, Yellen was unequivocal.
"I think it's on everyone's top list of concerns that we have about the financial system, about the problems facing financial organizations," she said. "It's a top concern of our own given the importance of the functioning of the payment system of the U.S. and global economy. Internally, we're paying a great deal of attention to make sure that we're addressing ever-escalating threats to our own operations, the banks that we supervise."
Yellen added that it's a "larger problem, and this is one where cooperation is needed among card systems, retailers and others involved in the financial system. And conceivably, legislation might be needed in this area."
While her exchange with Warren was unexpectedly tense, Yellen did receive relief from an unexpected quarter during the hearing. Sen. Bob Corker, R-Tenn., opened his questions by criticizing recent legislative efforts to "audit the Fed" by members of his own party. Corker then lobbed a softball at Yellen, asking whether she agreed with that sentiment.
"It seems obvious to me that the audit-the-Fed effort is to not meant to address auditing the Fed, because the Fed is audited," Corker said. "It's an attempt to allow Congress to put pressure on Fed members relative to monetary policy. And I would just advocate that that would not be a particularly good idea. Do you agree with that?"
"I would strongly agree," Yellen replied.