By Howard Schneider, Jonathan Spicer and Pete Schroeder
JACKSON HOLE, Wyo. (Reuters) - Reforms put in place after the 2007 to 2009 crisis have strengthened the financial system without impeding economic growth and any changes to these rules should remain modest, Federal Reserve Chair Janet Yellen said Friday in her fullest defense yet of the regulations enacted after the Great Recession.
"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," the Fed chair said at an annual central bank research conference.
Yellen's remarks amount to a broad defense of the existing regulatory framework, and an implicit rebuke of President Donald Trump's desire to drastically lighten the oversight of the financial sector in a bid to boost the economy.
They also may amount to her parting view on financial rules, as Trump considers whether to renominate Yellen to another four-year term as head of the central bank, with her current term expiring in February.
"She is sort of putting a stake in the ground here in terms of this regulation issue, which is the one sort of sticking point between her and Trump right now," said Phil Orlando, chief equity market strategist at Federated Investors in New York.
Yellen acknowledged some possible changes to individual regulations may be warranted, specifically mentioning possible relaxation of the Volcker rule limit on banks' equity trading, and further relaxation of rules that apply to medium-sized and smaller banks. Steps may be needed, she agreed, to improve liquidity in parts of the bond market, though that system remained "robust."
But she also defended several financial rules that have come under scrutiny by top Trump administration officials and leading Republicans in Congress. Specifically, Yellen defended the annual stress testing of large banks, allowing regulators to assign stricter oversight to firms critical to the financial system, and permitting regulators to step in and wind down failing financial institutions.
Republicans have long argued that the raft of new financial rules put in place as part of the 2010 Dodd-Frank financial reform law are hindering lending and the overall economy. An intense partisan divide in Congress will likely hinder any broad legislative rewrite of existing rules, but the Trump administration is slowly replacing regulators who drafted the initial post-crisis rules with new officials much more sympathetic to a lighter regulatory touch.
Trump's nominee as vice chair of the Fed for regulatory issues, Randal Quarles, has been an advocate of such changes. And Gary Cohn, Trump's top economic adviser and a reported favorite to replace Yellen, would also likely pursue more aggressive deregulation.
Overall, Yellen said, "any adjustment to the regulatory framework should be modest and preserve the increase in resilience" in a financial system she said is now better able to weather future shocks.
She did not mention monetary policy in her prepared remarks, disappointing some investors who had hoped she might offer hints on the Fed's path on interest rates.
U.S. stocks rose and the dollar fell, while Treasury yields dipped slightly.
Yellen said she and other current Fed members are not averse to revisiting how different regulations are working in practice, "and considering appropriate adjustments."
But she cautioned against putting the events of a decade ago too far in the rear view mirror."Already, for some, memories of this experience may be fading - memories of just how costly the financial crisis was," she told an audience of Fed staff and central bank colleagues from around the world.
The stability of the current system guards against a repeat, she said, while outside analysts have noted that it could also free central bankers to leave interest rates lower instead of worrying about the impact of those low rates on financial markets.
"The Federal Reserve is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system," she said.