Janet Yellen, the likely next chairwoman of the Federal Reserve, defended the central bank’s unconventional monetary policies Thursday morning and vowed to take seriously the Fed’s regulatory role, particularly in light of the lessons learned from the 2008 financial crisis.
During her confirmation hearing before the Senate Banking Committee, Yellen, currently vice-chair of the Federal Reserve, also spent a significant amount of time addressing how the Fed’s often opaque policies can improve the economic conditions of average Americans, who have been slow to feel the effects of a painfully gradual recovery.
For the past five years, the Federal Reserve has undertaken a series of unprecedented maneuvers to stimulate the economy, including three rounds of “quantitative easing,” a mechanism in which the central bank purchases assets from financial institutions in order to inject cash into the economy. The latest round has the Fed pumping out $85 billion a month and is meant to keep long term interest rates low as well as encourage borrowing, lending and spending. Critics charge that the policy is risky and threatens to ignite inflation if not checked carefully.
Several senators expressed concern about the wisdom of the scope of the program, its effectiveness, and the consequences when the Federal Reserve eventually starts drawing back the stimulus, as it has said it will as the recovery picks up steam.
“The economy has gotten used to the sugar you’ve put out there and I just worry that we’re on a sugar high,” said Sen. Mike Johanns, R-Neb. “And that is a very dangerous thing for the little person out there who’s just trying to put a buck away and maybe save for retirement.”
“What happens when this morphine drip starts to end?” echoed Sen. Pat Toomey.
But others believe that stimulus might still be needed in an economy where the unemployment rate remains stubbornly near 7 percent and millions more go uncounted in the official government tally because they have found part-time work or have given up altogether.
Yellen said the the Fed would monitor the data closely and calibrate an appropriate exit as soon as the labor market had improved and that she was confident it could be done without tanking the recovery or letting inflation rise beyond the bank’s goal of two percent.
“At this point, I believe that the benefits exceed the costs,” Yellen said. “It’s important not to remove support when recovery is fragile and the tools available to monetary policy should the economy falter are limited.”
Several members of the committee also probed Yellen on Fed policies designed to benefit the already affluent, pointing out that while stock markets have rallied and corporations are reaping profits, wages and income have remained stagnant. Sen. Bob Corker, R-Tenn. asked if the Fed’s “easy money” policies were “elitist.”
“It is the ultimate trickle down and it’s based on the premise that we’re going to have wealth creation,” Corker said.
His colleague from across the aisle, Sen. Sherrod Brown, D-Ohio, echoed the observation: "It’s not clear to me and not clear to many Americans who have not seen a raise in many years that [Fed policy] raises incomes and wages on Main Street.”
Yellen answered that although Federal Reserve policies had helped to boost the stock market, they have also played an important role in restarting growth in the housing sector and alleviated the burden on those whose mortgages were underwater.
Sen. Heidi Heitkamp, D-Wisc. was even more aggressive in her questioning, asking if the Fed policies had contributing to the burgeoning income and wealth disparities in the United States.
“Many of the underlying factors are things that are outside the Federal Reserve’s ability to address,” Yellen answered. “The policies we’ve undertaken have been meant to contribute to a robust recovery… I believe our policies have helped.”
She also noted that “fiscal policy had been working at cross-purposes to monetary policy,” and indicated that congressional showdowns over the budget and the risk of default had not aided the recovery.
Yellen fielded a variety of questions related to the Federal Reserve’s regulatory role and noted that supervising and devising rules for “too big to fail” banks was a central challenge for the Fed. She also acknowledged that signals had been missed in the lead-up to the financial crisis and lessons learned.
“Our supervisory role is critical and we need to take them just as seriously and devote just as much attention and time as we do to monetary policy,” Yellen said. She added, “I think we have a safer and sounder financial system than we had before the crisis but I think we need to do more in terms of putting in place regulations and enhanced supervision that will make the system as safe and sound to contain systemic risk.”
Yellen, who has a distinguished record as an economist in both government and academia, is widely expected to win the approval of the committee and sail through confirmation in the full Senate, despite a possible filibuster attempt by Sen. Rand Paul, R-Ky.