WASHINGTON Federal Reserve Board Chair Janet Yellen fought back Wednesday against accusations that the New York Fed and its president are too close to the biggest banks, saying the central bank and William Dudley have significantly toughened oversight since the financial crisis.
"I have great confidence in President Dudley," Yellen said. "He's done a fine job in running the New York Fed and he's a distinguished public servant and he has worked very hard in the aftermath of the crisis to ensure that the New York Fed is doing all that it needs to do to contribute to the work that we do in financial stability and bank supervision."
Yellen, speaking at a press conference Dec. 17 after the Federal Open Markets Committee's two-day meeting, added that she has a "good deal of confidence" in the Fed system's supervision programs in general, and that that confidence "also applies to the largest banking organizations." The Fed recently launched a review of its large bank supervision program, which is underway.
Yellen's remarks are the first she has made on the subject since an exposé by ProPublica was published in September based on secret audiotapes of internal conversations at the New York Fed, which depict regulators at the agency as personally close to big banks and hesitant to sanction questionable behavior. More recent news stories have emerged that a New York Fed official shared confidential information with an employee at Goldman Sachs.
The tapes and subsequent articles have led to charges of "regulatory capture" at the regional New York bank, which oversees the largest and most influential Wall Street banks.
The Senate Banking Committee held a hearing last month on the New York Fed and its alleged cozy relationships with the banks it supervises. At that hearing, Dudley was forcefully called to account for his agency's conduct, with Senator Elizabeth Warren, D-Mass., likening Dudley and his subordinates to "rent-a-cops" rather than robust regulators. Other lawmakers said they are considering legislation that would require the head of the New York Fed to be nominated by the President.
The revelations about the New York Fed come as the Federal Reserve System in general is under increased scrutiny on Capitol Hill, both from the left and the right. Yellen acknowledged that criticism from Congress centering around the bank's immense power and opaque decision-making processes and said she intends to be as transparent as possible without bowing to fleeting political impulses. She specifically said she would resist any overt efforts to limit the Fed's autonomy or authority.
"Congress has assigned us important tasks in monetary policy and in other roles that we perform," Yellen said. "The ability of a central bank to make the decisions about monetary policy that it regards as in the best longer-run interests of the economy, free of short-run political interference, is very important to the effective conduct of monetary policy. I think history shows not only in the United States, but around the world, that central bank independence promotes better economic performance.
Yellen's remarks followed an FOMC decision to keep interest rates at their near-zero level for the immediate future, at least through the middle of 2015. The FOMC said that inflation remains low, in part because of falling energy prices, but expects it to rise "as the transitory effects of lower energy prices and other factors dissipate."
The committee report indicated that 15 of its 17 members believe that the central bank's interest rates should rise in 2015, with most members preferring a rate between 1% and 2%. Members also expect rates to rise steadily to between 2% and 3% in 2016 and between 3% and 4.25% in 2017, eventually settling around 3.75% over the longer term.
The FOMC's economic projections, also released today, predict unemployment dropping from 5.8% to around 5.3% next year, and possibly falling as low as 5% by 2016. The Fed's report indicates that inflation will rise from around 1.3% today to between 1.7% and 2% in 2016 and 2017.
The Fed's report is the strongest indicator yet that the central bank will raise its interest rate from the near-zero rate that it has maintained since the 2008 financial crisis.