Created: 11/14/2013 6:25 AM KSTP.com
By: Jennie Olson
When Janet Yellen faces a Senate hearing Thursday on her nomination to lead the Federal Reserve, she is sure to face skepticism from Republicans who say the Fed's policies may be swelling asset bubbles or raising the risk of high inflation.
The one thing investors will most want to know is the one thing Yellen isn't likely to say: When she expects the Fed to scale back its stimulus for the economy.
In testimony prepared for the hearing, Yellen says the economy has regained ground lost to the recession. But she says unemployment remains too high and notes that the Fed is still trying to accelerate the recovery.
"For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery," Yellen says in her testimony. "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy."
As chairman, Yellen would likely extend the low-interest-rate policies pushed by the departing Ben Bernanke. As vice chairman, she's been a key architect of those policies. And in her prepared testimony, she offers no hints that she would deviate from them.
Yellen's prepared remarks amount to a defense of the extraordinary measures the Fed has used to try to keep long-term borrowing rates near historic lows to encourage spending and promote growth.
She's expected to stress Thursday that the Fed under her leadership would honor its dual mandate: To maximize job growth and keep prices stable. Yet at a time of still-high unemployment (7.3 percent) and low inflation (sub-2 percent), a Yellen-led Fed would likely favor Bernanke's approach of keeping rates low until the job market and economy improve consistently.
Even with some Republican resistance, Yellen's backing by the Senate Banking Committee and confirmation by the full Senate is viewed as all but assured. But approval won't come before critics air their grievances about the Fed's response to the financial crisis and the Great Recession.
Here's what to listen for at Thursday's hearing:
- TAPER TIMING
Investors will be alert for any hints of when a Yellen-led Fed might start reducing its $85 billion in monthly bond purchases - a slowdown often called "tapering."
The Fed has been buying Treasury and mortgage bonds to try to keep long-term rates low to fuel spending and growth. In June, Bernanke suggested that the Fed could start tapering its purchases by year's end if the economy improved as expected.
Stocks plunged on the news. And rates on long-term bonds and mortgages soared on investors' fear that the Fed's support for the economy would slow sooner than expected.
Since then, the economy and the job market have failed to show consistent strength. At its meetings this fall, the Fed decided the economy wasn't healthy enough for it to ease its stimulus even slightly.
Economists differ on whether the Fed will slow its bond buying when it next meets Dec. 17-18. Some say that despite a solid October jobs report, the economy remains too fragile. They think the most likely time for a pullback is March. That would be the first Fed meeting led by Yellen.
- FEWER SECRETS AT THE TEMPLE
Watch for any hints that Yellen might extend or expand the Fed's move toward more openness to the public.
A 1980s book on Paul Volcker's chairmanship, "Secrets of the Temple," described a secretive institution that revealed next to nothing. That began to change under Alan Greenspan, and the move toward transparency accelerated under Bernanke: The Fed included more details in its post-meeting statements, provided more frequent economic forecasts and scheduled regular news conferences by the chairman.
Yellen has been a leading proponent of openness. One area where she may impose her stamp: The guidance the Fed uses to assure investors that it plans to keep short-term rates low for the long term.
The Fed has left its benchmark short-term rate at a record low near zero since December 2008. It's said it plans to keep it there at least as long as unemployment exceeds 6.5 percent. Last week, two Fed economists produced papers suggesting that the 6.5 percent threshold should drop - to 5.5 percent or less. Doing so would signal to the public that the Fed would likely keep its benchmark rate low even longer than many assume.
Some economists now predict that at its March meeting, the Fed will say it's reducing its threshold for any increase in short-term rates to an unemployment rate of 6 percent.
- DUAL MANDATE
Though she'll take care to sound evenhanded, look for hints that Yellen thinks maximizing job growth is a more urgent priority now than the Fed's other duty to keep prices in check.
The dual mandate can be tricky: It can tug the Fed in opposing directions. To maximize employment, the Fed would normally lower rates. Conversely, to avert high inflation, it would seek to raise rates to slow growth.
Two Republicans on the Banking Committee, Sens. Bob Corker of Tennessee and David Vitter of Louisiana, support legislation to limit the Fed to just one mandate - guarding against high inflation.
Yellen and other Fed officials who back Bernanke's approach have argued that a still-subpar economy means the Fed must focus on boosting growth. They note that inflation remains well below the Fed's 2 percent target even while unemployment remains high.
President Barack Obama has expressed his desire to maintain the dual targets. In accepting Obama's nomination in October, Yellen perhaps tipped her hand about which of the mandates should take priority now: "Too many Americans still can't find a job and worry how they'll pay their bills," she said.
- RISKS OF FED BOND BUYING
Under Bernanke, the Fed has engaged in three rounds of bond buying to support the economy. Its investment portfolio has swollen to a record $3.85 trillion - a four-fold increase since the financial crisis struck in 2008.
Critics, including Republican lawmakers, argue that all the money the Fed has pumped into the economy is creating bubbles in stocks and perhaps other assets. Eventually, an asset bubble can pop with the same devastating effects that the collapse of the housing bubble produced.
Some also worry that the Fed's bond buying is ensuring future high inflation. And they say markets will be vulnerable to turbulent swings once the Fed starts selling its portfolio.
Investors will be listening for any comments from Yellen about the Fed's exit plans and whether she's considering safeguards to protect the markets and the economy from turbulence.
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