On Wednesday, Janet Yellen testified before the House Financial Services Committee.
Though the hearings lost much of their appeal when Dr. Ron Paul retired from Congress, the House Republicans have maintained a reputation for being far more hostile to the Federal Reserve than their colleagues in the Senate – managing to generate some worthwhile moments. While little news was made, with Yellen maintaining her support for generally low interest rates, there were some points made today worth noting.
1) Republicans Continue to Push on the Fed’s Subsidy to Wall Street
Starting in 2008, the Federal Reserve has paid interest on excess reserves parked at the Fed. While this had never been done prior to the financial crisis, this policy has now become a vital tool for the Fed in setting short-term interest rates. As the Fed has increased the Federal funds rate, so too has it increased its “Interest On Excess Reserves” (IOER), now paying 1.25% on the over 2 trillion banks hold at the Fed.
This policy has drawn increasing criticism from House Republicans, and Yellen faced criticism from both Committee Chairman Jeb Hensarling and Rep. Andy Barr, who hold Dr. Paul’s old position as chairman of the monetary subcommittee. Accurately, both men highlight that this policy means the Federal Reserve – and by extension the US Treasury that would otherwise receive these interest payments – are directly subsidizing large Wall Street and foreign banks. Considering these IOER payments are projected to be $27 billion this year, it’s good to more attention be brought to this obvious example of Wall Street cronyism.
2) Higher Interest Rates for Wall Street, not for Main Street
Continuing on the subject of IOER payments, Rep. Barr also highlighted that average consumers are not seeing any payoff from higher interest rates. Interest payments on CD’s remain historically low, with many consumers unable to get the 1.25% the Fed is giving their financial institutions.
As the Wall Street Journal documented, a reason for this is the way a decade of low interest rates have changed the consumer-bank relationship. All of this is simply another demonstration of how policies by the Federal Reserve are benefitting Wall Street at the direct expense of the rest of the country.
3) Maxine Waters Wants to Make Poor People Poorer
Maxine Waters may be best known these days for being one of Donald Trump’s most vocal critics, but she is also the leading Democrat on the Financial Services Committee. On Wednesday, Waters questioned Yellen on why mainstream inflation measures have been constantly undershooting the Fed’s 2% inflation target, and voiced her disagreement with the Fed’s minor increases in the Federal funds rate.
The way politicians like Ms. Waters discuss inflation makes it clear that they don’t truly comprehend how it presents itself in real life. After all, as someone who constantly fundraises off the dangers of income inequality and the plight of low income Americans, surely the last thing Ms. Waters would want to see is for the purchasing power of the dollar decline for the very people she claims to want to help.
4) Hensarling References Marvin Goodfriend
Earlier this week it was reported that President Trump will nominate former Treasury official Randal Quarles Fed Vice Chairman. During the hearing, Chairman Hensarling quoted another economist who has been connected to another Fed vacancy: Marvin Goodfriend. As a Treasury Secretary finalist who has worked with the Administration on banking regulation, Hensarling evoking Goodfriend is being taken by some a sign that his nomination is now simply a matter of when.
Unfortunately Goodfriend’s surname is misleading, as he has been a vocal advocate of negative interest rates. His nomination would be a devastating betrayal by Trump of his blue-collar base, for the reasons he himself articulated as a candidate.
5) Yellen still hates Audit the Fed
Thanks to Dr. Paul, the head of the Fed now knows to expect one question about Auditing the Federal Reserve. This time it was Rep. Bill Posey, who tried to push Yellen away from her default defense of mythical Fed independence. Mr. Posey repeatedly asked Ms. Yellen to name a single instance where the Fed would have been negatively impacted by a full audit.
The Fed Chairwoman was unable to provide an answer.