Federal Reserve Chairwoman Janet Yellen said any rollback of post-crisis financial reforms should be "modest" because they've made the banking system safer and more resilient, rebutting Republicans in Congress and the White House who blame regulatory red tape for holding back the U.S. economy.
Ms. Yellen, speaking in Jackson Hole, Wyo., on Friday, issued her broadest defense so far of the government's response to the 2008 financial-market meltdown while outlining some areas regulators could review to improve efficiency in the financial system.
"Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years," Ms. Yellen said, in what could be her final speech as Fed chairwoman at the annual gathering of central bankers. Her term expires in February. President Donald Trump could offer to nominate her for a second term, but economists polled by Bloomberg expect him to choose someone else.
In a 19-page speech that was almost entirely focused on financial regulations, Ms. Yellen did make a brief reference to the economy, noting that "substantial progress has been made toward the Federal Reserve's economic objectives of maximum employment and price stability."
Stocks held gains and the dollar fell with Treasury yields as her remarks lacked fresh guidance on interest-rate policy. The Federal Open Market Committee is scheduled to next meet Sept. 19-20. Investors don't expect the Fed to raise rates, according to pricing in federal funds futures contracts, although an announcement on the gradual unwinding of its $4.5 trillion balance sheet is anticipated after comments by several policymakers.
Ms. Yellen said some aspects of the Volcker rule, which limits proprietary trading by banks, may be simplified while the Fed is taking steps to reduce "unnecessary complexity" in regulations affecting small banks. More broadly, however, Ms. Yellen said the reforms have made the financial system stronger.
"The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth," she said.
Ms. Yellen's remarks could put her at odds with the Trump administration, which issued a Treasury Department report in June that called for "significant changes" to the Volcker rule.
Mr. Trump has made deregulation a pivotal part of his agenda for the financial industry, with the president and his advisers repeatedly blaming the Dodd-Frank Act for stifling lending and economic growth.
"Her underlying message is clear: Don't forget the lessons of the past. The next crisis is coming, and we need these stronger rules to stay in place," Harm Bandholz, chief U.S. economist at UniCredit Bank, wrote in a note to clients.
The Fed has sharpened its focus on financial stability since the crisis. Former Chairman Ben Bernanke established a new division at the board in Washington with the mission of keeping policymakers better informed. Supervision of large banks has become more centralized, and they are stress-tested every year.
"The Federal Reserve is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system," Ms. Yellen said.
During her term, Ms. Yellen has presided over rising asset and home values, while credit conditions have been tighter for borrowers with lower-ranked credit scores. Some of the Fed's own indicators suggest that financial risk is at lower-than-average levels.
Ms. Yellen said there was "reason to hope" that the economy would experience fewer crises and recover faster than in the past, but cautioned regulators have to remain vigilant to the ever-present risk of bubbles.
"I expect that the evolution of the financial system in response to global economic forces, technology and, yes, regulation will result sooner or later in the all-too-familiar risks of excessive optimism, leverage and maturity transformation re-emerging in new ways that require policy responses," she said.