Fed chairwoman blasts Trump on debt

Fed chairwoman blasts Trump on debt
© Haiyun Jiang

Federal Reserve Chairwoman Janet Yellen blasted Donald TrumpDonald John TrumpWSJ: Trump ignored advice to confront Putin over indictments Trump hotel charging Sean Spicer ,000 as book party venue Bernie Sanders: Trump 'so tough' on child separations but not on Putin MORE’s suggestion that he would renegotiate on the nation’s debt if elected president, warning of “very severe” consequences.

Testifying before Congress, Yellen was asked indirectly by Sen. Bob MenendezRobert (Bob) MenendezCNN anchors break into laughter over comedian's alleged prank call to Trump Comedian claims he tricked Trump while impersonating Dem senator Schumer: Obama 'very amenable' to helping Senate Dems in midterms MORE (D-N.J.) what she made of Trump’s claims that the U.S. could load up on debt and “make a deal” with creditors if the economy soured.

The presumptive Republican presidential nominee was not mentioned by name in the exchange, but Menendez asked Yellen specifically what would happen if a U.S. president pushed creditors to accept less than full payment on U.S. debt obligations.

Yellen launched a strong defense of the sterling reputation of U.S. Treasury bonds in global markets and made clear she believes the U.S. should make full payment on its debt a top priority.

“U.S. Treasury securities are the safest and most liquid benchmark security in the global financial system,” she told lawmakers. “They play a critical role in our financial markets, and the consequences of such a default, while they’re uncertain, I think there can be no doubt that it would be in the long run harmful to U.S. interests. At a minimum, it would result in much higher borrowing costs.”

She noted that she has long held the opinion that U.S. debt is sacrosanct, which she has previously expressed during pitched fights over raising the nation’s debt limit.

Yellen’s remarks came during testimony before the Senate Banking Committee Tuesday, where she indicated that the Fed is looking for more evidence of a solid economic recovery before raising interest rates further.

The Fed met earlier this month and decided not to raise interest rates after the May jobs report came in significantly below economist expectations. Yellen cited the slowdown on the jobs front as a major reason for the Fed’s decision to keep rates steady, despite a long-term effort to bring them back up from the historically low levels spurred by the financial crisis.

“The pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach to adjusting monetary policy remains appropriate,” she said.

At the same time, Yellen insisted that the overall U.S. economy was in a good place and said it would be highly unlikely for the nation to dip into a recession anytime this year.

But one major question looming for the Fed is what happens in Europe. On Thursday, British voters head to the polls to decide whether the United Kingdom should begin the process of removing itself from the European Union. Yellen warned that a “Brexit” could weigh heavily on financial markets and the global economy and could have an impact in the U.S. as well.

“Most analyses suggest it would have negative economic consequences for the U.K. and spillover in Europe,” she said. “I don’t want to overblow the likely impacts, but we’re aware of them. We’ll watch them and consider those impacts as we make future decisions on monetary policy.”

Yellen found herself playing defense from Democrats as much as Republicans Tuesday, as several key Democrats pressed Yellen on a growing issue of concern on the left: the lack of diversity at the top of the Federal Reserve’s institutions.

There has been a concerted campaign by activists to boost diversity among the top Fed ranks, noting that minorities and women have held almost none of the top Fed positions across the central bank’s 100-year history.

Sens. Sherrod BrownSherrod Campbell BrownOn The Money: Trump 'ready' for tariffs on all 0B in Chinese goods | Trump digs in on Fed criticism | Lawmakers drop plans to challenge Trump ZTE deal Dems pressure GOP to take legal action supporting pre-existing conditions Dems fume as Trump's consumer bureau pick refuses to discuss role in border policy MORE (D-Ohio), the top Democrat on the panel, and Elizabeth WarrenElizabeth Ann WarrenOn The Money: Trump 'ready' for tariffs on all 0B in Chinese goods | Trump digs in on Fed criticism | Lawmakers drop plans to challenge Trump ZTE deal On The Money: Trump rips Fed over rate hikes | Dems fume as consumer agency pick refuses to discuss border policy | Senate panel clears Trump IRS nominee Dems fume as Trump's consumer bureau pick refuses to discuss role in border policy MORE (D-Mass.), who is reportedly on Hillary ClintonHillary Diane Rodham ClintonBernie Sanders: Trump 'so tough' on child separations but not on Putin Anti-Trump protests outside White House continue into fifth night Opera singers perform outside White House during fourth day of protests MORE’s vice presidential shortlist, were among the members to press the issue.

Yellen said boosting diversity at the Fed is a priority, adding that progress had been made, although more is needed.

Warren also pressed Yellen on whether the Fed is prepared to crack down on the five large banks that have yet to put together a passable “living will” for regulators.

Under the Dodd-Frank financial reform law, the nation’s largest financial institutions have to craft a plan for their orderly wind-down should they collapse, which in turn must be approved by regulators. If they cannot craft a viable plan, regulators have the power to step in and order the banks to take steps to become safer.

In April, five banks — JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York Mellon and State Street — did not pass the living will test. They have until October to make the necessary changes, according to the Fed and the Federal Deposit Insurance Corporation.

Warren, along with Sen. David VitterDavid Bruce VitterSenate panel advances Trump nominee who wouldn't say if Brown v. Board of Education was decided correctly Planned Parenthood targets judicial nominee over abortion comments Trump nominates wife of ex-Louisiana senator to be federal judge MORE (R-La.), pressed Yellen on what she would do if those banks cannot pass, arguing the Fed needs to be prepared to order higher capital requirements or even to break up the institutions if necessary.

Yellen declined to lay out an explicit plan Tuesday but vowed that regulators would do what is necessary to ensure the financial system is safe.

“I can’t precommit today as to what precisely our response will be,” she said. “There will be consequences.”