Tags: Yellen | Senate | Fed | too big to fail

Yellen Wows Senate Banking in Debut

By    |   Friday, 28 February 2014 10:08 AM

Federal Reserve Chair Janet Yellen made her first appearance before the Senate Banking Committee in the traditional role of delivering the semi-annual report on monetary policy.

Because she has been confirmed by this Committee several times, she knows the senators very well, and there is considerable interchange between Yellen and her staff and the senators and their staffs. Much of the discussion at the hearing was obviously scripted, but there is much to be learned from the themes senators and their clients choose to raise.

For example, it is instructive that Chuck Schumer, D-N.Y., a member of the leadership who represents Wall Street, jawboned Yellen to consider suspending the taper on the ground that the economy is yielding some sluggish numbers. Yellen repeated her statement from her House testimony that policy is not on a pre-set course, but as of now, the Fed plans to wind down the pace of purchase of government and agency securities until the purchases would end next fall, although the Fed has no plans to reduce its portfolio of upwards of $4 trillion of securities except through normal runoff. Rep. Carolyn Maloney, D-N.Y., who also represents Wall Street, made a similar pitch to Yellen during the House testimony. Thus, it is pretty clear that Wall Street wants the taper to stretch out and even pause.

I have questioned from the outset whether the Fed could ever wean the economy from quantitative easing, and some observers are cynical enough to suggest that the Fed might reverse course and expand the range of assets it will purchase to support the economy.

Regulatory issues quickly came to the forefront at the Senate hearing. The relationship between the Committee and Fed chairmen is intimate enough that there are often meetings in advance to rehearse what will be said at the hearing.

One of the issues that arose is the composition of the Fed itself. On March 4, the Committee will hold a confirmation hearing for three nominees to fill out a Board that has become somewhat depleted. The star appointee is Stanley Fischer, former head of the Bank of Israel, and Sen. Bob Corker, R-Tenn., went out of his way to praise Yellen and former Chairman Ben Bernanke for recruiting Fischer to the Fed.

Current Fed Governor Jerome Powell has been reappointed, and the third nominee is Lael Brainard, a famed expert in international trade.

David Vitter, R-La., one of the Committee's many advocates for community banks, came armed with charts to support the case than an expert in community banking should serve on the Board, and Yellen agreed that the Board has benefited from such appointees in the past.

A more pertinent question would by why the Fed regulates banks at all and especially teeny tiny ones.

Yellen showed herself much more willing than previous chairmen were to engage with legislators on regulatory issues. This would be more significant if she were also willing to depart more readily from the positions of bank lawyers in and out of the Fed. The key issue is whether the Fed and other banking regulators have established that they have ended the policy of "too big to fail."

Elizabeth Warren, D-Mass., pointed out that the too big to fail banks have grown 38 percent since the 2008 episode of the ongoing financial crisis.

When Sherrod Brown, D-Ohio, confronted Yellen with a statement by Fed Governor Daniel Tarullo that the authorities "are not even close" to ending too big to fail, Yellen seemed surprised, and she repeated the party line that much progress has been made.

(Archived video and Yellen's statement can be found here.)

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Federal Reserve Chair Janet Yellen made her first appearance before the Senate Banking Committee in the traditional role of delivering the semi-annual report on monetary policy.
Yellen,Senate,Fed,too big to fail
Friday, 28 February 2014 10:08 AM
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