Thursday is the big day: Janet Yellen's confirmation hearing to be Fed chair. Here's more on what to expect from the hearing. But what should the members of the Senate Banking Committee ask her?
Morgan Stanley's economics team is out with its recommendations for 12 questions the senators should ask. Here are a few of their more interesting ones from the report, which might put her on the spot and shed light on the course of monetary policy in the months and years ahead.
Q: You assert that tapering (longer-term asset purchases) is not tightening (of monetary policy), but financial markets did not act that way this summer. When will you be convinced the economy can withstand tapering and how will you convince markets it is not a tightening of policy?
Q: At some point you will see the need to remove the extraordinary level of monetary policy accommodation. What would a so-called exit strategy look like under your leadership?
Q: Why are you talking about tapering when the unemployment rate is over 7 percent? Why don't you wait until it is nearer to 5 percent?
Q: Why are you sure that the appropriate long-run definition of price stability is 2 percent inflation?
But the senators should also seek to understand more about Yellen's broader philosophy on how to lead the Fed. For ideas on what those questions might consist of, here are Wonkblog's five recommendations. (These are repurposed from an item last summer on questions that President Obama should ask candidates for the Fed chairmanship; they apply just as well to the confirmation hearing setting.)
Is the push toward Fed transparency complete, or is there room yet to go? The central bank has made major strides toward being clear with the public about what it is doing. A generation ago, it did not acknowledge its policy changes publicly at all; now each one comes with a multi-paragraph statement announcing what the Fed has done, and why, and who dissented. Its goals for inflation and unemployment and expectations for how the economy will evolve were merely intuited; now they’re written in plain English for all to see. Since 2011, the chairman has given four news conferences a year; such communication was unheard of not that long ago. But Obama should ascertain whether he is nominating a new chair who will continue on that path or consider Fed transparency a project that is finished. If the former, what sorts of steps toward greater disclosure could you envision?
Do asset bubbles matter for monetary policy? Suppose you become convinced that securities markets, such as for stocks or corporate bonds, are trading far above their fundamentals. What would be your analytical process for determining if raising interest rates should be part of the response? When is a bit of economic weakness a price worth paying to reduce the risk of financial collapse?
What about that mandate? While most leading central banks are charged by their legislatures with targeting inflation (usually 2 percent), the Fed has more of a Rube Goldberg device in which they are directed to pursue both maximum employment and stable prices. That leaves a lot of leeway and room for interpretation, particularly when the two mandates come into conflict. Right now, the two are not in conflict; inflation is lower than the 2 percent the Fed aims for, and unemployment is too high, both pointing to easier monetary policy. But when we arrive at a day when inflation is at or somewhat above the target, but joblessness is still coming down slowly, it is worth knowing how a future Fed chair will interpret the choices he or she faces.
What does "macroprudential" mean to you? The big buzzword of financial regulation in the past few years has been “macroprudential,” which is to say regulating banks not individually in a vacuum, but with an eye toward knowing what risks they may be causing collectively for the economy. But beyond those broad notions, understanding how this works in practice is no easy task. A new Fed chair should have a compelling vision for how to ensure banks and other financial institutions are managed soundly and without risking the system.
What about the system? The chairman of the Federal Reserve is the chief of a sprawling and complex system of 12 reserve banks, along with the board of governors and its staff in Washington. The chair has to make some important decisions on how to run it. How much latitude should the reserve bank presidents have to decide how to regulate the banks in their district? Should the system of 12 banks, created a century ago for a different America, be overhauled? What sorts of traits should the Fed be looking for in presidents of those banks (the decisions are made by boards of directors of each reserve bank, but must be approved by the Board of Governors in Washington; right now they are primarily economists). The Federal Reserve system turns 100 at the end of this year; the next chair needs a vision on how it should change for the next century.
Got more ideas for questions the Senate should pose? Put them in the comments.