Janet Yellen faced the Senate today. Here’s everything you need to know.

November 14, 2013

Janet Yellen went before the Senate Banking Committee Thursday for her confirmation hearing to become (arguably) the world's most powerful economic policymaker. Her prepared statement was released late Wednesday. Read it here. Here are nine questions Wonkblog would like to see asked.

Check back here early and often for live updates from the hearing.

12:18 p.m.: That's a wrap

The hearing is over. The takeaways are simple: Yellen performed solidly, answering questions clearly and with no obvious mistakes. The tone was civil and warm, even in her back-and-forth with senators who are skeptical of the Fed's easy money policies. And there is no reason to think that her confirmation to be the next Fed chair is in doubt.

12:15 p.m.: Push back against "artificially" low rates

Sen. Chuck Schumer (D-N.Y.) offered a question to please the monetary economics nerds, pushing back against an idea, mentioned by several lawmakers during the hearing, that Fed policy is creating "artificially low" interest rates.

"Isn’t the zero lower bound in some ways also artificial?" asked Schumer. "Isn’t QE2 just another way to influence interest rates. If you didn’t do QE, wouldn’t interest rates be artificially high?"

Yellen clearly agreed, and offered what is surely the wonkiest answer in the entire hearing.

"If you judge what’s high or low by the needs of the economy, people sometimes talk about a concept called equilibrium real rate," Yellen said. "When there’s a lot of saving and not very much investment, which is where we are now, the natural forces of the economy are pushing interest rates down. It is these forces we're trying to cope with."

Against that backdrop, what would happen if the Fed hiked interest rates?

"If we were to try to push rates up when the economy has that much saving and such weak investment, we would truly harm the recovery. Having pushed rates to zero, by many estimates we would want to have negative interest rates. Of course we can’t achieve that. As you indicate, that's why we’re trying to push down longer-term interest rates."

11:58 a.m.: The Fed balance sheet to zero?

Sen. Mike Johanns (R-Neb.) pushed Yellen on his view that Fed policies are creating asset bubbles for the housing and stock markets. What would happen, he asked, if the Fed announced that it would reduce its balance sheet from around $4 trillion to zero over the next two years? Wouldn't that cause those prices to decline, he asked?

Um, yeah. That would be a dramatically tighter stance of monetary policy than any contemplated by the Fed or by the people who watch it (and beyond that, you wouldn't want to push it all the way to zero; even before the crisis the Fed had around $800 billion in assets on its books). Johanns is likely right that this would cause a dramatic decline in the stock market, home prices and other market indicators.

Here's how Yellen answered his concerns, particularly focusing on Johanns' worry that easy money policies are punishing savers who face low interest rates.

"I agree, and I understand savers are hurt by this policy," Yellen said. "But if we want to get back to business as usual and normal monetary policy and normal interest rates, we have to do that by getting the economy back to normal. That’s what I hope this policy will succeed in doing."

She added that savers need to worry about more than interest rates. "Savers wear a lot of different hats," she said. "They play a lot of different roles in the economy. They may be retirees who want part-time work to supplement their income. They may have children or grandchildren who are out of work or who are going to college and are hoping to put their skills to work.  . .  When those people who worry about our policies think of themselves as savers take into account the broader array of interests they have in the economy, they may see our policies as broadly beneficial."

11:44 a.m.: Regular meetings on bank regulation?

Sen. Elizabeth Warren (D-Mass.) pushed Yellen to see the Fed's responsibilities for bank regulation as deeply important, and she raised the idea of having regular meetings for Fed governors to consider bank supervision issues just as the Feds meet regularly to discuss monetary policy. "Do you think the board should have regular meetings on supervisory and regulatory issues, as well, making clear both of those are important to the Fed?" Warren asked.

Said Yellen, "I absolutely believe our supervisory responsibilities are critical and that we need to take them just as seriously, to devote just as much time and attention to them as we do to monetary policies."

At the same time, fulfilling Warren's specific proposal might be problematic, Yellen said.

"The Board operates under a variety of restrictions," she said. "When you suggest the board meet to discuss regulatory matters, our ability to do so outside of open meetings is very limited. So we tend to handle those by meeting individually with staff or meeting with small groups. We have a committee system where committees are put in charge of managing particular areas and making recommendations to the board."

The problem, in short: The Board of Governors is bound by open meetings rules and so must meet to set policy in public. But to openly discuss bank supervision matters, one must discuss confidential reports on the situations facing individual banks. It's hard to reconcile the two.

But, Yellen continued. "I remember in the 1990s that the board did regularly meet to discuss supervisory issues  . ..   I did consider those very valuable. I think that's a very worthwhile idea."

11:31 a.m.: What about the volatility?

Sen. Kay Hagan (D-N.C.) asked an important question: Is Yellen worried about the wild swings in global financial markets that have accompanied communications from the Fed? "Can we expect more volatility in the future?" Hagan asked.

Responded Yellen: "We’re trying as hard as we can to communicate clearly about monetary policy, both our goals and our intentions in terms of how we carry out programs. This is challenging. We’re in unprecedented circumstances. We’re using policies that haven’t really been tried before . . . We’re trying to explain to the public how we intend to conduct these policies. It is a work in progress and sometimes miscommunication is possible."

But that doesn't mean that even perfect communication would eliminate market volatility.

"My own view would be we certainly want to diminish unnecessary volatility," Yellen said. "Sometimes there's volatility because we all learn news about the economy that changes our views about  . . . the course of policy. There it’s natural to see a response. To diminish unnecessary volatility, we have to redouble our efforts to communicate as clearly as we possibly can."

11:20 a.m.: How many rate increases have YOU voted for?

Sen. Bob Corker (R-Tenn.) started his questioning by asking Yellen how many interest rate increases she had voted for. More than 20 was her guess (as a Fed governor in the 1990s and San Francisco Fed president in the mid-2000s, Yellen was in office through two cycles of monetary tightening). Corker said the number was 27. He asked her a leading question in which she said she had never voted against a rate increase.

The subtext of the exchange: Corker was giving Yellen a subtle way to remind everyone that she is not a monetary dove in all times and circumstances and, indeed, has been a full participant in Fed decisions to move toward tighter money in the past. Yellen is no perma-dove.

11:14 a.m.: Is there a stock market bubble?

Asked if she sees evidence the stock market is in a bubble, Yellen was dismissive of the possibility. "Stock prices have risen pretty robustly," she said. "But if you look at traditional valuation measures, you would not see stock prices in territory that suggest bubble-like conditions. When you look at the equity risk premium, the difference between expected returns on stock and safe assets like bonds, that premium is somewhat elevated historically, which suggests valuations which are not in bubble territory."

Asked if she sees a role for the federal government in supporting the stock market, Yellen was blunt and concise. "No," she replied, quickly.

11:09: There's gold in them thar hearing

Sen. Dean Heller (R-Nev.) asked Yellen whether she follows the price of gold. "To some extent," she replied.

Yellen elaborated that she believes nobody has a good model of what the fundamental value of gold is or should be, but that "certainly it is an asset that people want to hold when they’re very fearful about potential financial market catastrophe or economic troubles. . . . When there is financial market turbulence, often we see gold prices rise."

Heller seemed pleased that she gave a more detailed answer than current chairman Ben Bernanke did in a hearing last summer.

10:55: Belt and suspenders approach to bank capital

Sen David Vitter (R-La.) pushed Yellen on whether she would support more restrictions on the ability of too-big-to-fail banks to use borrowed money. “Would you support doing more in terms of leverage ratios for larges banks or not?” he asked.

Yellen indeed seems inclined toward high capital requirements for the biggest banks, though she seems to think existing legal requirements go a long way toward achieving it. “I believe we will have meaningful improvement in capital standards by going the direction Dodd-Frank recommended,” she said, mentioning in particular a capital surcharge demanded of systemically important institutions in law. . “We are contemplating a countercyclical capital surcharge. We can add to that. We are contemplating additional ways of dealing with problems of reliance on short term wholesale funding. That could take the form of a capital charge for reliance on that kind of funding, or could take the role of  margin requiremetns.

Yellen said she favors a “belt and suspenders kind of approach in which we have a leverage requirement that serves as a backup to risk based capital requirements.”

10:44 a.m.: Is QE trickle-down economics?

Sen. Sherrod Brown (D-Ohio) raised the concern that the Fed's easy money policies have benefited the wealthy and Wall Street without translating into gains for ordinary Americans, a form of "trickle-down economics." Said Brown: "It’s not clear to me and not clear to many Americans who have not seen a raise in many years that [Fed policy] raises incomes and wages on main street."

Responded Yellen: "It’s true that in the first instance, the policies that the Fed conducts when we implement monetary policy drive down interest rates and affect asset prices. You use the term 'trickle down.' They tend to affect interest-sensitive spending. But the ripple effects go through the economy and bring benefits to, I would say, all Americans. Those who are unemployed and find it easier to get jobs as the recovery gets stronger. For those who have jobs, you mention wage growth has been weak or nonexistent in real terms in the last several years. As the economy  recovers, my expectation is that will change. If we can generate more robust recovery in the context of price stability than more Americans will see meaningful increases int heir well-being."

Notably, Yellen didn't really dispute the idea that the first-order benefits of the Fed's policies have accrued largely to the affluent, such as those who have stock market investments.

10:34 a.m.: Bubble, bubble, toil and trouble?

Sen. Bob Menendez (D-N.J.) pushed Yellen on whether she sees financial bubbles being created by the Fed's easy money policies. She had a dual-edged response to his two questions.

First, she said she doesn't see significant asset bubbles. "At this stage I do not see risks to financial stability. We do not see broad buildup in leverage that poses a risk to financial stability."

However, she acknowledged that this was a risk created by the Fed's low interest rate policies, and even said that she could imagine a scenario in which interest rate increases could be warranted to fight bubbles. “An environment of low interest rates can induce risky behavior, and I cannot rule out monetary policy conceivably having to play a role," she said.

10:31 a.m.: Fed is weighing taper at each meeting

Crapo asked when the Fed might taper its bond-buying program, which has added $85 billion in securities to the central bank's books each month for more than a year. Yellen's answer? It depends on data -- and Fed officials are analyzing the question at every policy meeting.

"At each meeting we are attempting to assess whether we have seen meaningful progress sin the labor market," she said. "What the committee is looking for is evidence that we have growth that is strong enough to promote continued progress in the labor market. . . . While  there is no set time that we will decide to reduce the pace of our purchases, at each meeting we are attempting to assess whether or not the outlook is meeting the criteria that we’ve set out to reduce the pace of purchases."

10:28 a.m.: QE Infinity? No, says Yellen

Sen. Mike Crapo (R-Idaho) asked, "How long can we artificially operate monetary policy at what I consider such extreme levels of quantitative easing?"

Yellen's reply was to note that when the current program of bond buying was launched, unemployment was 8.1 percent and the Federal Open Market Committee, the central bank's policy-making panel, was pessimistic that joblessness would come down rapidly. "The Committee expected little or no meaningful progress in bringing down unemployment," she said. "We indicated our goal was to see substantial improvement in the outlook for the labor market. This program is not on a set course. It is data dependent. But we have seen improvement in the labor market."

Crapo, more pointedly, asked if the program could continue indefinitely--might the Fed embark on QE-Infinity, as some in markets have referred to it?

No, is Yellen's answer.

"I would agree that this program cannot continue forever, that there are costs and risks from the program," Yellen said.  "You noted risks to financial stability. Those are risks that we take very seriously. The committee is focused ona  variety of risks and recognizes that the longer this program continues the more we will need to worry about those risks. I do not see the program as continuing indefinitely."

10:22 a.m. Yellen emphasizes symmetry on tapering

Johnson asked a question about the dangers of tapering the Fed's quantitative easing program too soon. Yellen pivoted a bit and noted that there are risks on both sides -- risks that could stem from ending the program too soon and ones that could arise from leaving the policies in place too long. "I think there are dangers frankly on both sides, of ending accommodation too early," she said. "There are also dangers we have to keep in mind with maintaining program too long."

It was a veteran move, not letting herself be trapped by the question into emphasizing only one set of risks. Had she narrowly answered the question and only talked about the risks of winding down bond buying too soon, it could be interpreted as a signaling that policy is moving in a dovish direction.

10:20 a.m.: Janet Yellen notes long-term unemployment

Answering the first question, from Sen. Tim Johnson (D-S.D.), about unemployment, Yellen noted that the current bout of high unemployment has had a particularly high rate of long-lasting period of unemployment.

Correction: An earlier version of this piece incorrectly identified Sen. Mike Crapo (R-Idaho) as being from Utah.

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