Tags: Yellen | Senate | Fed | mandate

Yellenomics Aired at Senate Banking Committee Hearing

By    |   Friday, 15 Nov 2013 01:44 PM

The Senate Banking Committee, chaired by Tim Johnson, D-S.D., held on Nov. 14 its confirmation hearing on the appointment of Janet Yellen, current vice chairman of the Federal Reserve, to succeed Ben Bernanke as chairman when his term expires at the end of January.

The hearing was a re-enactment of meetings Yellen had held with senators in their offices earlier in the week, and many of them complimented her on the quality of the meetings. I believe there is no question that she will be confirmed, and if it is not unanimous, negative votes will reflect disquiet of a minority of senators regarding the extraordinary accommodation the Fed has provided to financial markets in an attempt to stimulate, or at least to "simulate," the economy.

In opening statements, Johnson credited Yellen with an outstanding record of identifying trends in the economy, having spotted the housing bubble in 2005 and 2008, while Michael Crapo, R-Idaho, warned about imbalances caused by the extended asset purchases by the Fed. He repeated tired industry complaints that stricter regulation would hamper the ability to compete in global markets, in keeping with the aggressive posture adopted by empowered banking lobbies.

Having worked in the Fed system for over three decades, Yellen is steeping in its culture, and she represents continuity much more than change, as Bernanke did when he took over from Alan Greenspan. The Fed's "mission gallop" may have extended its mandate well beyond the traditional so-called "dual mandate," but Yellen stuck to the three principal charges of the Fed.

First, with respect to inflation control, she reiterated the Federal Open Market Committee's adoption of a 2 percent target and she elaborated on the theory that when the policy rate is at zero and the economy still needs stimulus, in theory, interest rates should be negative, so instead the Fed resorts to unconventional measures such as buying bonds, in order to influence interest-sensitive sectors of the market, such as banking, housing, and autos.

She added that in deciding when to taper, the Fed would consider the signals from financial markets, but not be a slave to them.

Regarding the second mandate, full employment, she pledged to continue accommodative policy, even if tapering of bond purchases takes place, until unemployment declines further.

Finally, with the enactment of Dodd-Frank, the Fed has taken on a more visible role as the financial regulator most responsible for overseeing systemic risk. Yellen repeated familiar assurances of improvements in the condition of the biggest banks, but she was more pointed than other regulators have been in emphasizing that the Fed is considering ways to address the risk posed by the reliance of these banks on wholesale, short-term sources of funding.

However, an early test will come as the Fed moves to implement the so-called Volcker rule, which is supposed to separate risky trading activities from traditional banking services in order to avoid subsidizing hedge funds' activities with insured deposits. Banks have been squawking loudly that Dodd-Frank rules would increase their costs, and if the Fed caves in to this pressure, as seems likely, this would indicate that the Fed has reverted to business as usual in regulating "too big to fail" banks.

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Robert-Feinberg
The Senate Banking Committee, chaired by Tim Johnson, D-S.D., held on Nov. 14 its confirmation hearing on the appointment of Janet Yellen, current vice chairman of the Federal Reserve, to succeed Ben Bernanke as chairman when his term expires at the end of January.
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2013-44-15
Friday, 15 Nov 2013 01:44 PM
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