Madame Chairman Holds Her Own

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The members of the Senate Banking Committee were well-behaved as they questioned Federal Reserve Vice Chairman Janet Yellen, who, if confirmed, would be the first woman to run the Fed in its 100 year history. As for hot, market-moving headlines, Yellen's comments would seem to reduce the odds of a December, or any near-term, tapering. "Purchases have made a meaningful contribution to economic growth," Yellen said in the Q&A following her short opening statement, released yesterday. They "cannot continue forever."

While policy makers evaluate the costs and benefits of the asset-purchase program at every meeting, "It's important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero," she said.

I suspect Ben Bernanke would have offered a similar assessment. Yellen, until now a behind-the-scenes operative who has close relationships with central bank colleagues around the globe, held her own at the hearing. She answered the senators' questions -- on monetary, regulatory and communication policy -- politely and succinctly. Like Bernanke, she said micro- and macro-prudential regulation should be the Fed's first line of defense against asset bubbles. However, she didn't rule out using the "blunt instrument" of monetary policy to address asset price misalignment and agreed that it's "important for the Fed to attempt to detect asset bubbles when they are forming."

Yellen defended the Fed's easy-money policies against critics pointing to sugar-highs in asset markets. Yellen said she did not see evidence of "bubble-like conditions" in either the stock market's price/earnings ratio or the equity risk premium. And yes, the Fed is focused on financial stability and other lessons learned from the financial crisis.

Short of any political shenanigans, Yellen should be approved by the full Senate. Some lawmakers may not like the Fed's means to an end, but no one can disagree with what Yellen said was "an imperative to do what we can to promote a strong recovery." Madame Chairman?

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