Testifying before the House Financial Services Committee today, Federal Reserve Chairman Janet Yellen highlighted opportunities for Congress and financial regulators to streamline and reduce regulatory burdens. For example, she urged Congress to exempt community banks from the Volcker Rule and suggested that the Fed is interested in a “simplified capital regime” for community institutions and in revisiting the high-volatility commercial real estate guidance issued by federal agencies.
She also praised the Treasury Department’s recent report on financial regulation, noting that it includes “many useful and productive suggestions that mirror things we have been doing with respect to tailoring regulations” and adding that while she does not agree with every recommendation, there is “a lot in it that’s very useful.”
Yellen’s testimony principally addressed monetary policy and economic conditions, and she noted that due to the historically low “neutral rate,” the federal funds rate “would not have to rise all that much further to get to a neutral policy stance.” However, she expects the neutral rate to rise over time, meaning that “gradual rate hikes are likely to be appropriate over the next few years.”
She added that the Fed expects to begin its balance sheet unwinding this year, should the economy continue on its present course. “Once we start to reduce our reinvestments, our securities holdings will gradually decline, as will the supply of reserve balances in the banking system,” she said. “The [Federal Open Market] Committee currently anticipates reducing the quantity of reserve balances to a level that is appreciably below recent levels but larger than before the financial crisis.”