Yellen Says Economy Performing ‘Far Short’ of Potential
Janet Yellen, nominated to be the next chairman of the Federal Reserve, signaled she will carry on the central bank’s unprecedented stimulus until she sees improvement in an economy that’s operating well below potential.
“A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,” Yellen said in testimony for her nomination hearing before the Senate Banking Committee today in Washington. “Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”
Yellen, the Fed’s vice chairman, voiced her commitment to using bond purchases known as quantitative easing to boost growth and lower unemployment that remains above 7 percent more than four years after the economy began to recover from the deepest recession since the Great Depression.
“Her approach is, ‘Let’s do more QE now to get the job done faster,’ ” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former researcher at the New York Fed. “Yellen is repeating her commitment to getting the job done.”
In three pages of prepared remarks for the 10 a.m. hearing, released yesterday, Yellen, 67, said unemployment is “still too high, reflecting a labor market and economy performing far short of their potential,” and that inflation is expected to remain below the Fed’s 2 percent goal. She also highlighted areas where the economy has improved, saying housing “seems to have turned a corner” and the auto industry has made an “impressive comeback.”
Treasury 10-year yields rose one basis point, or 0.01 percentage point, to 2.73 percent as of 10:11 a.m. in New York. The benchmark yield slid seven basis points yesterday, the biggest one-day drop since Oct. 22.
Because inflation is low today, a policy maker “can be an inflation hawk and be in favor of policy accommodation at the same time,” said Lou Crandall, chief economist at Wrightson ICAP LLC, a research firm in Jersey City, New Jersey.
“I expect to learn more about her style than anything substantive” under questioning today from senators, Crandall said. “As far as specifics, she doesn’t want to antagonize those who would vote against her.”
Yellen’s testimony comes at a critical moment for monetary policy. The Federal Open Market Committee she is poised to lead is considering whether to begin slowing its $85 billion monthly bond-purchase program, which is pushing the Fed’s assets toward a record $4 trillion. The Fed has kept its target interest rate near zero since December 2008.
Yellen publicly voiced her views for the first time in seven months on the unprecedented monetary stimulus that she’s supported and that some lawmakers have used to justify voting against her. Yellen refrained from publicly engaging in the asset-purchase debate, while she was under consideration to succeed Chairman Ben S. Bernanke, whose term expires Jan. 31. Her last public address, on regulation, was delivered June 2. She has not given a speech on monetary policy since April 16.
If confirmed, Yellen will also lead the Fed’s efforts to finish implementation of the most sweeping overhaul of financial regulation since the 1930s. Rules on proprietary trading and bank capital are pending.
Yellen said “important work lies ahead” in making the financial system safe and stable. Her comments on how she would curtail risk at the largest banks upheld the Fed’s current strategy.
U.S. regulators are trying to ensure that a failure at one of the largest banks won’t threaten a repeat of the financial crisis that required bailouts of banks including Citigroup Inc. and Bank of America Corp. The Dodd-Frank Act requires banks to write plans on how they would wind operations down, and it empowers the Federal Deposit Insurance Corp. to reorganize a failing bank while imposing losses on shareholders and creditors.
Yellen signaled support for capital and liquidity rules, as well as “strong supervision,” to help reduce the perception that some banks are too big to fail.
“In writing new rules, however, the Fed should continue to limit the regulatory burden for community banks and smaller institutions, taking into account their distinct role and contributions,” she said.
The U.S. central bank is imposing higher capital and liquidity standards on the biggest banks as required by Dodd-Frank, and examining how banks fare in a crisis through its annual stress test.
“It’s a note from their well-played songbook,” said Joseph Engelhard, senior vice president at Capital Alpha Partners LLC in Washington. “There is an implicit recognition that too-big-to-fail exists,” even though the Fed has “the tools to deal with it.”
In her remarks, Yellen said “the past six years have been challenging for our nation and difficult for many Americans,” crediting Bernanke for averting an even more dire outcome.
“The effects were severe, but they could have been far worse,” Yellen said. Under Bernanke, “the Fed helped stabilize the financial system, arrest the steep fall in the economy and restart growth.”
The banking committee, consisting of 12 Democrats and 10 Republicans, will vote at a later date on whether to advance Yellen’s nomination to the full Senate. She’ll need the support of at least 60 senators to win confirmation.
Tim Johnson, chairman of the committee and a Democrat from South Dakota, said in prepared remarks that he is “excited to cast my vote to confirm her as the first woman to serve as chair of the Federal Reserve.”
Four of the committee’s Republicans, including Idaho Senator Mike Crapo, the senior member, opposed Yellen when she was considered for Fed vice chairman in 2010.
“I still have concerns, which were the concerns behind my original vote on her original nomination, about her support of the quantitative easing and the entire direction the bank has been going for the last few years,” Crapo said in an interview last week. He has not committed to how he will vote this time.
The other banking committee Republicans who previously opposed Yellen are Alabama’s Richard Shelby, Louisiana’s David Vitter and Tennessee’s Bob Corker. She was supported in 2010 by Nebraska Senator Mike Johanns, a Republican. None of the panel’s Democrats have said they’ll oppose her nomination.
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