Yellen Rejoins QE Debate as Hearing Gives Critics ForumJoshua Zumbrun, Jeff Kearns and Craig Torres
Federal Reserve policy makers have publicly debated whether to maintain their bond-buying pace since well before Janet Yellen was named last month to succeed Chairman Ben S. Bernanke. One voice has been missing: Yellen’s.
Tomorrow, she’ll express her views publicly for the first time in seven months on the record stimulus she’s supported and that some lawmakers are using to justify voting against her. Testifying to the Senate Banking Committee, Yellen will try to defend a policy that’s swelled the Fed’s balance sheet to almost $4 trillion while facing four Republicans who voted no on her 2010 bid to be vice chairman.
“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,” Idaho Senator Mike Crapo, the senior Republican on the Banking Committee, said in an interview. Crapo, who voted against her in 2010, said he hasn’t committed to how he would vote this time.
While Crapo and other critics on the panel may not have enough allies to block her, they have ample ammunition to make the hearing contentious. The nation’s jobless rate has exceeded 7 percent for more than four years since the end of the longest recession since the Great Depression, even as the Fed presses on with an unprecedented program to keep interest rates low.
Democrats hold 12 seats on the Banking Committee, enough to send her full nomination to the Senate, even without Republican support. At least one Republican, Mike Johanns, a Nebraska lawmaker who supported Yellen in 2010, said he would probably renew his support “unless something were to come up.” No Democrat has voiced opposition to Yellen.
Yellen has “demonstrated that her experience in the Federal Reserve System and her position as the point person for monetary policy make her the most qualified person for this job,” Senator Sherrod Brown, an Ohio Democrat, said in a statement. Brown wrote a letter signed by 20 Democrats in support of Yellen before she had been nominated.
In 2010, Republican senators including Crapo, Alabama’s Richard Shelby, Louisiana’s David Vitter and Tennessee’s Bob Corker, all of whom remain on the banking panel, opposed her.
“I can’t envision a scenario where she’s blocked,” said Greg Valliere, chief political strategist for Potomac Research Group in Washington.
While the hearing may pose few roadblocks to her confirmation, it will give Yellen the opportunity to explain the philosophies that will guide her conduct as she decides when to wind down an $85 billion-a-month bond purchase program and when to raise the Fed’s target interest rate, which has been held near zero since December 2008.
As vice chairman, Yellen led a subcommittee focused on the Fed’s communications strategy, and during her tenure has given detailed speeches on how the central bank’s policies work.
Once under consideration for the top job, she stopped giving speeches. Her last public address, on regulation, was delivered June 2. She has not given a speech on monetary policy since April 16.
Though she has not detailed her precise views on the Fed’s current strategy, she has voted in favor of every decision of the Federal Open Market Committee under Bernanke. In a meeting with Louisana’s Vitter she continued her support of those policies, according to Vitter.
The FOMC began $40 billion in monthly purchases of mortgage-backed securities in September 2012 and announced it would add $45 billion in Treasury securities to that pace in December. Fed officials have said their current pace of purchases will continue until the labor market improves “substantially.”
Yellen “didn’t back off on that at all,” Vitter said in a Nov. 6 interview with Bloomberg Television’s Peter Cook. “So we just disagree there.”
The hearing will provide investors a chance to hear her views and assess whether stocks will continue the upward trajectory of the Bernanke years.
Equities in the U.S. are near record highs. The Standard & Poor’s 500 Index has rallied 24 percent this year, putting it on pace for the best annual gain in a decade. The gauge has rebounded 161 percent from a 12-year low in March 2009, adding more than $10 trillion in market value. The index fell 0.4 percent today to 1,761.36 at 9:41 a.m. in New York.
Speculation that the Fed would begin to taper its bond buying helped push 30-year mortgage rates to a two-year high of 4.58 percent in August, while the yield on the 10-year Treasury rose to a two-year high of 3 percent in September. The average mortgage rate was 4.16 percent as of Nov. 7, while the 10-year note yield was 2.73 percent.
At their September meeting, Fed policy makers voted unexpectedly to keep the QE program unchanged, a decision they repeated at an Oct. 29-30 gathering. Economists surveyed by Bloomberg News last week predict the first tapering of the program won’t occur until March.
Yellen may opt to be circumspect in outlining her views, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, and a former Richmond Fed researcher.
“Everyone is expecting her to lay out this super-detailed manifesto of her beliefs on how the Fed should run policy and what she intends to do but the reality is she’s just trying to get confirmed,” Stanley said. “She’ll just want to get in and out without saying anything that gets her in trouble. She has every reason to be as Plain Jane uncontroversial as she can.”
Senators will be eager to hear Yellen’s perspective on bank bailouts and regulation. When Bernanke was renominated to be Fed chairman in 2010, he was opposed by a bipartisan group of 30 senators, the most ever for a Fed chief, as many lawmakers fumed over bailouts of the largest financial institutions. Yellen may have to defend those crisis-era decisions.
“I didn’t support the QE and I didn’t support the bailouts so we do have some philosophical differences,” said Senator Dean Heller, a Nevada Republican on the banking panel, in an interview last week. Heller said he had not decided how he would vote, “but I do want to take a very fair look at this and give her every chance possible.”
Last month, when President Barack Obama announced her nomination, Yellen said more needs to be done to strengthen the nation’s economic recovery.
“While we have made progress, we have farther to go,” she said Oct. 9. “The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they will pay their bills and provide for their families.”
On Nov. 8, a Labor Department report showed employers added 204,000 workers to payrolls last month, more than economists forecast, on the strongest hiring by companies since February.
If confirmed, Yellen will 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.
U.S. financial regulators are also trying to ensure that a failure at one of the largest banks won’t threaten to trigger an economic collapse, requiring taxpayer support to prop up the bank. The Dodd-Frank Act requires banks to write plans on how they would wind operations down, and empowers the Federal Deposit Insurance Corp. to reorganize a failing bank while imposing losses on shareholders and creditors.
Still, Congress is skeptical that the largest, most complex banks could fail without taxpayer support. Senate Banking Committee members Brown and Vitter, have introduced a bill that would set 15 percent capital requirement for so-called megabanks, those over $500 billion in assets, as a way to reducing the likelihood of failure. The measure has yet to see movement.
The Fed is already moving banks toward higher capital buffers with its annual stress tests.
Senator Elizabeth Warren, a Democrat from Massachusetts, and John McCain, a Republican from Arizona, also have introduced a bill aimed at re-creating the Glass-Steagall Act, the Depression-era measure that separated commercial and investment banking.
Assuming Yellen makes no missteps in the hearing, she is likely to go on to win confirmation from the full Senate, and replace Bernanke, whose term expires Jan. 31, said Robert Shapiro, chief executive officer at Sonecon LLC, an economic advisory firm in Washington, and a former Commerce Department official under President Bill Clinton.
“I don’t think that there is going to be any broad Senate Republican resistance to her,” Shapiro said. “They’ve been burned for putting the economy at risk through the shutdown and the debt limit. I just don’t think they want to be subject to that attack again, and that’s certainly what the Democrats and the White House would say.”