WHY IT MATTERS
The Federal Reserve chair is the chief executive officer of the U.S. Federal Reserve banking system, whose central mandate is to pursue fiscal policies that keep employment high and inflation low. As the leading voice for the Fed’s board of governors, the chair’s every word can influence financial markets. And as Janet Yellen demonstrated Thursday, even a president’s nominee for the post can make waves: Her expression of support at her confirmation hearing for continued low interest rates and Fed bond buying to prop up the economy was credited in part as major U.S. stock indexes closed at all-time highs for the second day in a row.
— Staff report
Janet Yellen made clear Thursday that she’s prepared to stand by the Federal Reserve’s extraordinary efforts to pump up the economy, if that’s what it needs when she’s chairwoman.
During a two-hour confirmation hearing before the Senate Banking Committee, Yellen expressed strong support for the Fed’s low interest-rate policies. She warned critics that any potential harm those measures pose is outweighed by the risk of leaving a still-weak economy to survive without them.
“I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” said Yellen, the Fed’s current vice-chair.
As President Barack Obama’s nominee for the post, she faced tough questions, particularly from Republicans. But she also drew praise from senators in both parties and is expected to be confirmed by the full Senate, becoming the first woman to lead the powerful central bank.
A committee aide said Banking Chairman Tim Johnson, D-S.D., plans a vote as soon as possible, potentially next week — though some senators have said that they plan to hold up the nomination as leverage to gain Senate action on other matters.
Yellen’s testimony represented a strong defense of the Fed’s policies under retiring Chairman Ben Bernanke to combat the Great Recession and the financial crisis.
The latest efforts include spending $85 billion a month on bond purchases, which are intended to lower long-term interest rates and promote faster economic growth.
The Fed has also said it plans to keep its key short-term rate near zero at least until the national unemployment rate falls to 6.5 percent. It is now 7.3 percent.
Some Republicans expressed concerns at the hearing about the bond purchases, which have swelled the Fed’s balance sheet to $3.8 trillion. They are worried that the money flooding into the financial system is inflating stock and real estate prices, creating asset bubbles that would have a disastrous impact on the economy if they burst.
“I think the economy has gotten used to the sugar you have put out there and I just worry that we are on a sugar high. That is a very dangerous thing,” said Sen. Mike Johanns, R-Neb.
Yellen repeatedly assured senators that the Fed is mindful of those risks. But she cautioned that there were other dangers if the Fed pulled back prematurely. The economy could weaken further and unemployment could rise.
Pressed by Republicans to specify when the central bank might begin scaling back the bond purchases, Yellen didn’t bite. She said Fed policymakers assess the risks and benefits of the bond purchase program each time they meet.
“The committee is looking for … signs of growth that are strong enough to promote continued progress” in the labor market. She said “there is no set time that we will decide to reduce the pace of our purchases.”
The Fed has said that it wants to see stronger data before it reduces the stimulus. Recent reports have been encouraging.
The government said last week that the economy added 204,000 jobs in October, and many more in the previous two months than initially reported. And the economy grew at a 2.8 percent annual rate from July through September, the fastest pace in a year.
Yellen told senators that the economy has regained ground lost to the Great Recession, but it still needs the Fed’s support because unemployment remains too high.
She also praised Bernanke for his “wise and skillful leadership.”
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Yellen and Bernanke are considered to be among the more “dovish” members of the Fed. Those are officials who believe the Fed should be more focused now on job creation because unemployment is high and inflation is mild. But so-called “hawks” have expressed worries that the Fed’s policies are raising the risk of higher inflation down the road.
Private economists viewed Yellen’s comments as a strong signal that Bernanke’s policies will continue at the Fed.
The central bank’s last meeting of the year is Dec. 17-18 and it will meet again in January, which will be Bernanke’s last meeting as chairman. He steps down on Jan. 31 after eight years at the helm.
Many economists believe that the earliest the Fed would begin reducing the bond purchases is at the March meeting. That would be Yellen’s first as chairwoman, presuming she is confirmed by then.
The timing of a full Senate vote remains uncertain.
David Vitter, R-La., announced after the hearing that he will vote against her nomination. Yellen is likely be opposed by several other Republicans who have criticized the Fed’s policies. But Yellen will probably win support from most Democrats and a handful of GOP senators.
Democratic Sen. Sherrod Brown of Ohio said after the hearing that he would support Yellen, calling her “the most qualified person for this job.”
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