The Washington PostDemocracy Dies in Darkness

Lawmakers grill Fed chief in testy hearing on Capitol Hill

Federal Reserve Chair Janet L. Yellen testifies Wednesday before the House Financial Services Committee in Washington. (Gary Cameron/Reuters)

The Federal Reserve is facing heightened political pressure from both sides of the aisle as it debates whether to keep raising interest rates amid a weakening outlook for the global economy.

Lawmakers adopted a confrontational tone Wednesday during Fed Chair Janet L. Yellen’s hearing before the House Financial Services Committee as they grilled her on the central bank’s strategy for withdrawing its historic support for the nation’s recovery. Republicans have long fought to rein in the Fed’s powers, but even Democrats proved combative Wednesday, with several accusing the central bank of ignoring the plight of minority workers.

“We have got to get the Fed to get off the dime and put the issue of African American unemployment on the front burner,” said Rep. David Scott (D-Ga.).

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Democrats have generally supported the Fed’s aggressive stimulus over the past seven years. Then in December, the central bank raised its benchmark interest rate for the first time since the Great Recession, a sign of its confidence in the health and progress of the economy.

Now, that assessment is coming under fire on Wall Street and in Washington. Financial markets have been roiled this year by fears that China’s growth engine is stalling. That has sent commodity prices plunging and upended emerging economies that supplied China.

On Wednesday, Yellen cautioned that continued turmoil could dampen U.S. growth and acknowledged the risks from a sustained slowdown in emerging economies. She pointed to recent declines in stock markets, higher interest rates for risky borrowers and the growing strength of the dollar as potential threats. Still, she said that a slowdown in U.S. growth was more likely than an outright recession and that she did not expect that the Fed would cut rates any time soon.

I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy, Yellen said.

Wall Street ended the day mixed after a solid open. The Standard & Poors 500-stock index was virtually unchanged after opening in positive territory, while the tech-heavy Nasdaq composite index booked a slight 0.3 percent gain. The closely watched Dow Jones Industrial Average swung to a loss in the final hour of trading, closing down 100 points, or 0.6 percent.

The outlook for the recovery is uncertain enough that investors are betting that the Fed will not raise rates again at its next meeting in March. Some have even predicted that the central bank will not hike them at all this year. Meanwhile, Democratic lawmakers expressed skepticism Wednesday about the durability of the recovery and highlighted the country’s uneven improvement.

“Race matters when it comes to how people experience our economy,” said Rep. Keith Ellison (D-Minn.).

Yellen acknowledged that black workers have higher rates of unemployment but noted that the Fed had limited power to address the issue. The central bank can steer the broader economy, she said, but policy prescriptions that target specific groups of workers were the responsibility of Congress.

The central bank has been “doing everything that we can to promote a stronger labor market that will benefit African Americans,” Yellen said.

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Lawmakers and Yellen sparred on a host of other issues, including the structure of the central bank, the size of its more than $4 trillion balance sheet and whether it has the legal power to introduce negative interest rates. In addition, the committee released a letter from about two dozen economists urging the Fed to adopt more stringent rules to guide its decisions.

“It is fatal conceit to believe that the Fed is capable of micromanaging our economy to some state of economic nirvana,” said Rep. Jeb Hensarling (R-Tex.), the committee’s chairman.

Also notable was the animosity that members of both parties expressed at the Fed’s payments to the nation’s largest banks on the reserves held at the central bank. A decade ago, Congress gave the Fed the power to make those payments, and they have since become a critical tool in the Fed’s efforts to phase out its stimulus. But on Wednesday, lawmakers attacked the provision as a subsidy for large financial institutions.

“It looks like we’re going to have some bipartisan concern,” Rep. Maxine Waters (Calif.), the committee’s ranking Democrat, said, exchanging a smile with Hensarling. “We really do have to deal with this issue.”

The nation’s central bank is politically independent, although its Washington-based Board of Governors is appointed by the president. Yellen was tapped by President Obama in 2014 and confirmed by the Senate with the backing of mostly Democratic lawmakers. She previously served as a top economic adviser to President Bill Clinton.

Fed policy has been a point of contention in the presidential campaign as well. Democratic candidate Bernie Sanders  wrote a scathing op-ed in the New York Times recently that criticized the Fed’s decision to raise rates in December and called for greater transparency at the central bank. Republican candidate Ted Cruz has advocated a return to the gold standard, and rival Donald Trump accused the Fed of stoking another financial bubble.

“Tightening without bipartisan support has historically been a challenge for the Fed,” said Mark A. Calabria, director of financial regulation studies at the right-leaning Cato Institute. “The Fed may soon find itself without any political friends, a situation largely of its own making.”

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