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Review of Yellen's Testimony to the House Financial Services Committee

Thursday, 27 February 2014 06:51 AM

On Feb. 11, the new chair of the Federal Reserve, Janet Yellen, presented the Fed's semi-annual report on monetary policy to the House Financial Services Committee. She was scheduled to make the same presentation later that week to the Senate Banking Committee, but that hearing was postponed due to snow. It has been rescheduled for Feb. 27, and presumably the snow, while it is falling again, won't be of blizzard proportions.

The two committees alternate the opportunity to hold the first hearing of the two that occur in each semi-annual cycle. The Senate hearing is more significant, because there are fewer frivolous questions, but sometimes there is significance to the House going first if monetary policy is in the news at the time and if the Committee asks pertinent questions.

The biggest news of the day was the mastery Yellen displayed of a normally cantankerous Republican committee. Apparently the stock market noticed, because it rose 200 points. Later, Paul Williams, Yellen's successor as president of the Federal Reserve Bank of San Francisco, said the Fed doesn't pay much attention to daily market action, but it's nice to be able to say that with the knowledge that the event was well-received.

One of the ways that Yellen disarmed the Committee was by sitting hour after hour as members asked the same questions over and over, giving even the most junior legislators their moment rather than invoking a limit of three hours or so.

Part of the political capital Fed chairmen enjoy is the opportunity to curry favor by making valuable appearances that can boost the image of members with their constituents. However, it is important to use this power judiciously, and Yellen showed she has already learned this lesson.

When the prickly Steve Pearce, R-N.M., complained that former Chairman Ben Bernanke had never faced a town hall meeting to explain to senior investors why the Fed has kept interest rates so low, then extended the same invitation to Yellen, she merely acknowledged the invitation without responding substantively.

In response to several questions about the Fed's intentions regarding the tapering of Fed purchases of Treasury and housing agency securities, Yellen stressed that the program is not on a pre-set course. Carolyn Maloney, D-N.Y., who represents Wall Street, took the opportunity to jawbone for a slowing of the tapering.

Several questioners chided Yellen about the exemption Dodd-Frank provides for holding Treasury and other sovereign debt, so that they are treated as risk-free, and they also asked whether the Fed should do more to encourage "too big to fail" banks to reduce their risk. In both cases, Yellen demurred, choosing to accept the apparent contradictions in Dodd-Frank as a means of reducing the risk of another financial crisis that remain nearly four years later. Asset managers have mobilized legislators to push back against the designation of some of the largest as systemically important financial institutions, subject to supervision by the Fed, and the insurance industry is protesting what it alleges is unfair application of bank-like standards to what the industry claims is a completely different model. Yellen has responded sympathetically to these protests and assured questioners that Fed regulation will be tailored to each industry.

(Archived video, the Fed report and the staff memorandum can be found here.)

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On Feb. 11, the new chair of the Federal Reserve, Janet Yellen, presented the Fed's semi-annual report on monetary policy to the House Financial Services Committee.
Thursday, 27 February 2014 06:51 AM
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