The president’s nominee to head the Federal Reserve, Janet Yellen, faced a fairly placid reception at the Senate Banking Committee today. Lawmakers had plenty of questions, but most of them seemed unlikely to oppose her confirmation.
Yellen acknowledged numerous times over the course of the hearing that she sees a continuation of QE3 as viable, confirming the suspicion that she would remain “dovish” on inflation.
Markets reacted over the course of the hearing, with global markets up and precious metals such as gold and silver up on spot prices after Yellen finished speaking. When questioned about gold, Yellen said that she didn’t think anybody has an accurate model for gold prices, but conceded that gold prices rise with uncertainty and fears of inflationary monetary policy.
The hearing, which USA Today called “Must-see TV for Wall Street,” offered up many portents of the future Yellen Fed leadership. Yellen’s main concern is with unemployment, which she says is too high even at 7.3 percent, but she acknowledged that it is probably significantly higher if measured using metrics such as the labor force participation rate. Her estimate is that real unemployment is at least 10 percent. She maintained that inflation is low, though some economists would suggest that real inflation is significantly higher.
One theme that emerged was that Yellen is very open to the idea of the Fed having a more activist supervisory role in the future, and that she plans on continuing the push for additional capital requirements. Senator Elizabeth Warren (D-Mass.) appeared to goad Yellen into stating that the Fed would “need to make reining in the banks a top priority of the board,” calling for additional regulations. Yellen also suggested that she might institute margin requirements, counter-cyclical capital surcharges, and other policies similar to those seen in European central banks such as in Denmark. Yellen seemed to look to other central banks for precedent, citing their actions at numerous points throughout the hearing and inspiring Senator Richard Shelby (R-Ala.) to remark that the U.S. should set the precedent, not follow it.
Yellen frequently looked forward to a time when the economy gets “back to normal” and pointed to growth outlooks as the greatest indicator of when it might occur. She also heartily agreed with Senator Bob Menendez (D-N.J.) when he suggested that it was a demand-side drag that was holding the economy back.
Remarks from senators like Warren and Heidi Heitkamp (D-N.D.) about income inequality and inflation led Yellen to express support for some typically liberal/progressive viewpoints. She volunteered that income inequality as we know it today probably originated in the 1980’s, suggesting that she is sharply critical of Reagan-era policy. There have been gains over the years, but “a disproportionate share of those gains have gone to the top 10 percent, even the top 1 percent,” said Yellen, revealing a considerable amount about her own political and economic philosophy. She even blamed income disparity on changes such as the decline of unions.
Yellen appeared to have little sympathy for people afraid of inflation. In response to concerns from Senator Mike Johanns (R-Neb.) on personal savings, she remarked:
I agree and I understand that savers are hurt by this policy. ... It’s important to recognize that savers wear a lot of different hats. They play many different roles in the economy. ... When those people who worry about our policy, thinking about themselves as savers, take into account the broader array of interests they have in a strong economy, they would see that these policies—even though they may harm them in one respect—are broadly beneficial to them as I believe they are to all Americans.”
Her outlook appears to be based around economic models rather than people.
Continuously sounding the call for more transparency in the Fed and praising her own efforts to make the organization more open and accessible, Yellen nonetheless expressed opposition to an “Audit the Fed” bill. When asked whether QE is causing an equity bubble, she said that she does not believe the asset injections have inspired bubble-like conditions. Senator Bob Corker (R-Tenn.) wondered whether Yellen would “have the courage” to pop bubbles if she perceived them, and she responded affirmatively.