Publicly facing senators for the first time since she was nominated by the president to become Chair of the Federal Reserve, Janet Yellen said there's more work to be done to "regain the ground lost" during the financial crisis and recession. The panel must still hold a vote to send her appointment on to the full Senate for consideration. Despite the politically charged environment in Washington, the hearing was remarkably cordial.
During the confirmation hearing held by the Senate Banking Committee, Yellen said "supporting the recovery today is the surest path to returning to a more normal approach to monetary policy." That is seen as an affirmation of the Fed's extraordinary measures, such as $85 billion in monthly asset purchases, aimed at boosting growth.
In his opening statement, ranking Republican Mike Crapo of Idaho said he's "concerned that markets have become overly reliant" on the asset purchases. He noted, as Fed officials themselves concede, that low rates have hurt individuals' ability to save.
During questioning, Yellen said the Fed must "do what we can to promote a strong economic recovery." She said "unemployment remains" high, pointing to figures showing about one-third of the jobless have been without work for six months or more. She called that "virtually unprecedented." The Labor Department recently reported that unemployment stood at 7.3 percent in October.
Yellen was asked by Sen. Crapo whether asset purchases are creating undue risks. She said a "number of studies have been done" on the impact and that she believes the "purchases have made a meaningful contribution to economic growth and improving the outlook." She added the program "cannot continue forever" and that the Fed takes the risks "very seriously." Pressed when the purchases might begin to be scaled back, Yellen said "there is no set time" and that "no one wants to go through another financial crisis."
Yellen said traditional measures of the stock market don't suggest "bubble-like tendencies."
Sen. Elizabeth Warren, D-Mass., asked whether the Fed was partly responsible for the financial crisis by failing to engage in sufficient regulation and supervision. Yellen replied: "There have been important lessons learned." She said there's been a "massive ramping of supervision of the largest institutions" since the crisis and that a top priority has been monitoring of the "financial system as a whole."
Many economists believe the so-called "tapering" process could begin early in 2014, with the first increase in short-term interest rates in 2015. Sen. Bob Corker, R-Tenn., praised Yellen for her "transparency" during the hearing.
Many Yellen critics describe her as a "dove" because of what they regard as the Fed's "easy money" policies during her tenure as Vice Chair Corker seemed to seek to diffuse that criticism when he asked Yellen about her willingness to raise rates during her term as a Fed governor from 1994 to '97. Yellen said she had voted 20 or more times to raise rates and that she had never voted against a rate increase when it was on the table. Corker said, in fact, she'd voted to boost rates 27 times during that period.
Seeming to cast blame on Congress itself for the continuation of the asset purchases, Sen. Mark Warner, D-Va., noted that lawmakers have not been able to come to agreement on budget issues because of "political dysfunction." Yellen responded by saying the economy has been showing "greater momentum" despite fiscal drag estimated by the bipartisan Congressional Budget Office to reduce annual growth by 1.5 percent.
The scaling down of asset purchases has its own risks, said Yellen. She said there are "dangers on both sides" of continuing too long and exiting too early. Lynn Reaser, chief economist, Point Loma Nazarene University, says "exiting from the aggressive stance of monetary ease may be the greatest test ever faced by the Federal Reserve." Reaser says like the program itself, "there is no precedent for such an exit and therefore no guidebook as to what should be the proper path and speed." Indeed, Yellen testified that "we're using policies that have never been tried before."
Panel chairman Sen. Tim Johnson, D-S.D., said he was would be "excited" to cast a vote to confirm Yellen. An aide says the Banking Committee plans to vote on the nomination as soon as possible, which could be early next week.
If confirmed, as expected, Yellen would be the first woman to head the nation's central bank in its 100-year history. Current Chairman Ben Bernanke's term ends in January.