‘Significant uncertainty’ about fiscal policy under Trump: Fed’s Fischer

COVENTRY, England: U.S. Federal Reserve Vice Chair Stanley Fischer said there was significant uncertainty about U.S. fiscal policy under the Trump administration, but the Fed would be strict in meeting targets of creating full employment and getting inflation to 2 percent.

Speaking at the Warwick Economics Summit on Saturday, Fischer also said he thought Dodd-Frank financial regulation would not be repealed as a whole, and he hoped capital requirements for banks would not be significantly reduced.

"There is quite significant uncertainty about what´s actually going to happen, I don´t think anyone quite knows. It´s a process which involves both the administration and the Congress in deciding fiscal policy," Fischer said, in response to a question.

"At the moment we´re going strictly according to what we see as our responsibility according to the law, which is maintaining full employment and getting inflation to 2 percent."

He also said he thought Dodd-Frank banking regulation legislation would not be repealed, though there may be some adjustments.

"I don´t think Dodd-Frank as a whole is going to be repealed, but there may be some adjustments to it," he said.

"Significantly reducing capital requirements would reduce the safety of the system. I certainly hope it´s not going to happen."

Dodd-Frank financial regulation was passed in 2010 after the financial crisis of 2008-09, and included legislation requiring banks to maintain higher levels of capital.

Fischer also mentioned adjustments to Dodd-Frank could include being less demanding of community banks.

The comments came the day after the Federal Reserve Board´s top bank regulator, Daniel Tarullo, said he would resign, giving a boost to President Donald Trump´s plans to ease reforms put in place after the 2008-09 financial crisis. 

Tarullo, a strong regulator who was dovish on monetary policy in his seven years on the board, said in his resignation letter to Trump he would leave the U.S. central bank on or around April 5.

With his resignation, Trump will have three positions to fill on the Fed´s Board of Governors, which at full strength has seven members.

With the goal of never needing taxpayer bailouts of failed banks, Tarullo has been strict about carrying out the 2010 Dodd-Frank Wall Street reform law and administering rigorous "stress tests" annually to banks on how prepared they are to withstand unexpected shocks.

The tests gave Tarullo huge control over the largest U.S. banks.

Performance in the exams dictates how much money they can return to shareholders in dividends or spend on stock buybacks.

Failure puts bank bosses under pressure and lenders devote thousands of staff and hundreds of millions of dollars to passing the tests.

Tarullo has also pushed for bigger capital buffers and other checks on potential risks banks may pose to the world´s financial system.

His departure leaves many questions about the future of financial regulation.

Tarullo sees the direction of changes under Trump as unclear, but said he expects the core elements put in place during his tenure of increasing capital requirements, risk management, and a resolution regime for big banks may survive.

"I´m hopeful that they really do command a broad enough consensus that this was a way to combat the ´too big to fail´ problems which obviously bedeviled the system in the years leading up to and in the crisis itself," he said.

One bank executive, who declined to be quoted by name, said the industry is relieved the Tarullo era is over.

Bankers had long complained he and his staff kept changing the stress tests and balance-sheet reviews in ways that arbitrarily ratcheted up capital requirements behind closed doors.

"He made up rules in a black box and would not bother to explain their rationale to banks," the executive said.

Tarullo said changes to the stress tests, known by the acronym CCAR, that he and Yellen have proposed, on including capital buffers and a Global Systemically Important Bank surcharge, are "moving along right now.

""It´s going to provide more certainty to the banks about what the next final stage of CCAR will look like," he said.

Liberal and progressive groups said Tarullo had fought to protect Americans from another financial crisis or economic catastrophe.

"Governor Tarullo has stood steadfast as a sentinel on the front lines of a six-year war to turn the Dodd Frank financial reform law into a reality," said Dennis Kelleher, president of Better Markets, a group created to promote economic stability.

Besides crafting regulation, Tarullo is a voter on interest rate policy, with a record of tending toward caution on raising rates.