Janet Yellen’s First Hearing as Fed Chair

February 11th, 2014 at 12:18 pm

[Trying to follow this in the background amidst much else to do…will update as needed.]

And the key word is…”continuity.”  Many of us said Yellen was the “continuity candidate” and she appears to be making that case today as she testifies on monetary policy to the House Financial Services Committee.

…let me emphasize that I expect a great deal of continuity in the FOMC’s approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve’s statutory mandate of maximum employment and price stability.

As far as signaling next steps, no surprises there either so far–again, it’s continuity, not changes that’s the theme I believe she’s trying to impart.  And this makes sense regarding “well-anchored expectations”–i.e., the new chair wants to be careful not to undermine the messages the Fed has sent to markets in recent months regarding one of their most important challenges in coming months and years: unwinding monetary support in a way that doesn’t hurt growth.

BTW, the other important challenge, one that has in the past gotten too short shrift, is ratcheting up the Fed’s financial oversight role, something Ms. Yellen has emphasized since her hearing to lead the Fed.  In this regard, it was notable to see a section of her testimony devoted to that topic, wherein she mentioned leverage rules, the Volcker rule, resolution authority, derivatives oversight, and more.  Obviously, it’s all in the doing, not the saying, and it’s critical for members of Congress sympathetic to financial reform along with the rest of us who care about this to connect the words with actions.

Finally, there was this important signal, reiterating that the Fed recognizes that their 6.5% unemployment benchmark is biased down by labor force exits.

…based on [the Committee’s] assessment of a broad range of measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments–is that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal.

To be clear, I’m worried that the Fed is in danger of doing what golfers call “giving up the hole.”  That’s where you’re so intent on playing the curves in the green that sinking the putt becomes secondary.  There’s a risk that they’re more worried about a smooth unwinding and managing expectations than providing the needed support for a recovery that continues to underwhelm.

But that said, and given that this is her first outing as chair, Ms. Yellen looks to be making a strong and sensible case for steady at the helm.

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5 comments in reply to "Janet Yellen’s First Hearing as Fed Chair"

  1. Robert Buttons says:

    If financial oversight is key, who is overseeing the federal reserve? And why is congress dragging its feet on the tripartisan Paul-Grayson-Sanders transparency legislation?

  2. Larry Signor says:

    “continuity” may be a good thing, depending on an economic actors present situation. For most of us, “continuity” simply means a continuing slog, declining compensation, retirement uncertainty and a very strong sense of non-inclusion. Perhaps Ms. Yellen could have rocked the employment boat a wee bit. Fiscal policy is the answer. An aggressive fiscal policy will raise GDP, tax revenues and private investment, thus making the Feds winding down policy much easier to implement without harm to the economy. If the Fed is not pushing for fiscal expansion, it should be.

    • Robert Buttons says:

      We have a fed that has nationalized the yield curve and meddled in the equities markets. How much more aggressive can they possibly be?

      Given our still weak economy, if QE is helpful, they will be guilty of malpractice for not doing more. If QE is NOT helpful, then they are already guilty of malpractice.

      • Larry Signor says:

        The FED has very little to do with fiscal policy. That is a legislative responsibility which can enhance the FEDs monetary tools. The flattened yield curve makes fiscal policy a feasible option. This is not Ms. Yellens option, but she could push for more fiscal stimulus. This is quite different than a monetary policy approach.

        • Robert Buttons says:

          I would disagree that the fed has little to do with fiscal policy. IMO, they are monetizing the debt— Full disclosure: the powers that be disagree with my assessment: “I object to the view that the Fed is monetizing the debt,”–ATL fed chair Lockhart.

          In any event, fed actions are lowering interests rates, allowing the govt to spend more on “stimulus” (stimulus defined here as any non-private sector spending) and less on debt servicing. Further, the buying of MBS puts more money into the private economy, a sizable portion of which is returned to the treasury as taxes, to be spent as stimulus. So if the fed doesn’t control fiscal policy, they are certainly aiding and abetting those that do.

          I would further argue that stimulus doesn’t work. Compare the unemployment predictions of the Obama Stimulus (Romer, et al “The Job Impact of the American Recovery and Reinvestment Act” 2009.) to what actually transpired. Japan is an incredible experiment in stimulus. So far, it is not going so well……we’ll see how it turns out.