Janet Yellen, the nominee for Federal Reserve chairman, defended the central bank’s bond purchases in a letter to a U.S. senator, saying they boosted economic growth and provide benefits that exceed the risks.
“By putting downward pressure on longer-term interest rates and helping to make financial conditions more accommodative, the Federal Reserve’s asset purchases have supported a stronger economic recovery, improved labor-market conditions and helped keep inflation closer to its 2 percent objective,” Yellen said in a Nov. 18 response to questions from Senator David Vitter, a Republican from Louisiana.
In a separate letter to Senator Elizabeth Warren, Yellen said “monetary policy is likely to remain highly accommodative for a long time,” even after the Fed reaches thresholds for considering an increase in the main interest rate.
Yellen, at a Nov. 14 confirmation hearing, told the Senate Banking Committee she’s committed to promoting a strong recovery, reducing 7.3 percent unemployment and ensuring stimulus isn’t removed too soon. The Fed has held the main interest rate near zero since December 2008 and pumped up its balance sheet to a record $3.91 trillion through bond purchases.
Yellen said in her Nov. 18 letter to Warren that the Federal Open Market Committee’s pledge to keep the main interest rate exceptionally low as long as the unemployment rate exceeds 6.5 percent should be considered a threshold, not a trigger for action.
“Once a threshold has been crossed, the committee will not necessarily raise the federal funds rate target immediately,” Yellen wrote in her response to Warren, a Democrat from Massachusetts. “Instead, crossing a threshold will lead the committee to consider whether an increase in rates would be appropriate.”
Vitter asked Yellen if the central bank’s bond purchases constitute a bailout of the largest financial institutions, creating “Wall Street’s new ‘Too-Big-to-Fail’ policy.”
She responded that the purchases have “benefited American families and Main Street businesses,” in part by reducing interest rates on mortgages and auto loans.
Separately, the Fed plans to issue a proposal “shortly” describing its policies and procedures for the use of its emergency lending authority, Yellen said in her letter to Vitter.
In response to a question from Warren about whether the Fed was devoting enough resources to regulating the largest banks, Yellen said the Fed has approximately 215 staff members at the six largest bank-holding companies, including JPMorgan Chase & Co. and Goldman Sachs Group Inc.
Senator Jerry Moran, a Kansas Republican, asked Yellen about steps the Fed was taking to ease the regulatory burden on community banks. Yellen responded in a letter that the assumption big banks will be bailed out by the government is “a damaging economic phenomenon that corrodes market discipline of our largest banking firms and contributes to an un-level playing field between large banks and small banks.”
Efforts to strengthen regulation of the largest banks should help “level that playing field,” she said.
Yellen, the Fed’s vice chairman, was nominated by President Barack Obama to succeed Chairman Ben S. Bernanke, whose term expires in January. Her letters were sent in response to written questions submitted by senators after last week’s hearing. The banking committee plans to vote at 10 a.m. on Nov. 21 on whether to advance Yellen’s nomination to the Senate floor.
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