Janet L. Yellen is widely expected to win confirmation as the Federal Reserve’s first chairwoman. Her appearance before the Senate Banking Committee on Thursday morning is mostly a chance for senators to probe what kind of leader she will be.
Who is Janet Yellen? Read my October profile. What is the Federal Reserve? Ask and ye shall receive. Where can I watch the hearing? C-Span. Can you tell me what Ms. Yellen is going to say even before she says it? Why, yes. Glad you asked.
On to the main course: a little background on issues that senators are likely to probe. Like most nominees for high office, Ms. Yellen has little to gain by being frank or specific in her responses. She is known for being both things, however, so cross your fingers and hope she makes a little news, for my sake if nothing else.
1. How about you blink once for December or twice for March?
The questions most urgently on the minds of investors are the ones Ms. Yellen is least likely to answer. We will not learn Thursday when the Fed plans to start tapering its asset purchases, because that decision has not been made. We are not even likely to hear a clear statement of her own view on the subject.
We are likely, however, to hear Ms. Yellen’s assessment of the economy. That’s important because fluctuations in the economic outlook are the key determinant of short-term policy shifts. Fed officials tend to have relatively stable views about the appropriate response to a given set of economic circumstances, and we already know quite a bit about Ms. Yellen’s. It’s the circumstances that change.
It’s also possible Ms. Yellen will offer some insight into the Fed’s deliberations about the best ways to convince investors that it intends to hold short-term interest rates near zero even as it curtails and eventually ends its bond-buying campaign.
2. If you’re stimulating the economy, why can’t I feel it?
Republicans, in particular, are likely to challenge Ms. Yellen’s assertion that the Fed’s bond purchases are producing clear economic benefits.
A wide range of economists agrees that the Fed’s stimulus campaign has helped the economy, at least a little. But that view is less common outside the academy. A New York Times/CBS News poll in September found only one in three Americans had confidence in the Fed’s ability to promote economic growth.
One simple explanation is that the Fed’s efforts clearly have been insufficient. The share of Americans with jobs has not increased since the recession. The economy remains weak - “on the cold side,†Mr. Bernanke said Wednesday - and as a result, inflation has slowed to pace that the Fed regards as unhealthy.
The skepticism may also reflect the distribution of benefits. Low interest rates have helped governments and large corporations save a lot of money. The wealthy have benefited from rising asset prices. But for many Americans, struggling to find jobs and pay down debts, it may feel as if the recession never ended.
3. Megabanks, huh, yeah. What are they good for?
The Senate Banking Committee is surprisingly well stocked with Democrats and Republicans concerned that the nation’s largest banks are too large.
“It has been three years since Dodd-Frank was passed, the biggest banks are bigger than ever, the risk to the system has grown, and the market distortions have continued,†Senator Elizabeth Warren, Democrat of Massachusetts, said Tuesday.
Ms. Warren and other senators plan to take up the issue with Ms. Yellen on Thursday, pressing her on the Fed’s slow progress to put in place rules required by the 2010 Dodd-Frank Act, and exploring her support for additional constraints.
Ms. Yellen has made clear that she has some sympathy for these concerns. She said in June that she might support stronger limitations on the use of borrowed money as a funding source. She has been less supportive of limitations on the range of business banks are allowed to conduct. Megabanks and their critics will be listening Thursday for any amplification of Ms. Yellen’s views on the subject.
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