All in all, it was an impressive performance from the sixty-seven-year-old product of Fort Hamilton High School, in Bay Ridge, Brooklyn, if not a particularly surprising one. Senator Sherrod Brown, a Democrat from Ohio, pointed out that Yellen, who has held a number of senior positions at the central bank over the past twenty years, including, most recently, serving as Ben Bernanke’s deputy, might be the most qualified person ever chosen to run the Fed. And yet, she hasn’t been without her critics. During the summer, when there was widespread speculation that President Obama was intent on passing over her in favor of Larry Summers, some anonymous Administration officials questioned whether she had the chops to respond to financial crises and do all the other things that heads of central banks are expected to do. While one accomplished appearance on Capitol Hill doesn’t make Yellen a successful Fed chairwoman, she has already quieted some of the doubters.
On a substantive level, Yellen reaffirmed her support for the Fed’s current ultra-accommodative monetary policy, featuring near-zero short-term interest rates and large-scale purchases of Treasury securities and other long-term bonds—a policy known as quantitative easing. In response to the first question of the hearing, from Democrat Tim Johnson, of South Dakota, Yellen said, “I would be strongly committed to working with the Federal Open Market Committee to continue promoting robust economic recovery.”
Earlier this year, Bernanke suggested that the Fed might start drawing down its asset purchases; he abruptly reversed course when long-term interest rates, and particularly mortgage rates, started rising. Yellen said the Fed would continue to evaluate the right moment to change its policy, but she also stressed that it was “important not to remove the support when the recovery remains fragile.” If the economy were to falter again with interest rates already very low, she explained, the Fed wouldn’t have much of a backup plan.
In April, I wrote that Yellen might be the most dovish head of the Fed since Marriner S. Eccles, the Mormon banker whom F.D.R. appointed during the Great Depression. These statements from Yellen seemed to confirm that impression, as did her allusions to the fact that inflation was running well below the Fed’s target rate of two per cent, and her pointed references to the human costs of high unemployment rates. Repeating something she said in a speech earlier this year, she pointed out that more than a third of the unemployed have been out of work for more than six months, and she said that such extended periods of joblessness took a great toll on the families and the marriages of those affected.
With the official unemployment rate still above seven per cent, and the real rate probably quite a bit higher than that, it is perfectly appropriate, and indeed imperative, for the Fed to adopt an accommodative policy. As Yellen pointed out in her opening statement, G.D.P. growth is well below the capacity the economy can bear, and there is a lot of slack remaining. The real issues facing the Fed are how much its policies, especially quantitative easing, are helping to remedy this situation, and whether they are creating the conditions for another ruinous asset-price bubble.
Responding to suggestions from Republican Senator Mike Crapo, of Idaho, that quantitative easing had done very little to boost the over-all economy and was creating “serious risks in financial markets,” Yellen defended the program, saying it had “made a meaningful contribution to economic growth and improving the outlook.” She pointed out that the Fed’s actions had helped to keep mortgage rates low, which had contributed to a recovery in house prices that was “helping substantially” many American households, particularly ones that had been saddled with home loans worth more than the value of their houses. But Yellen also acknowledged that quantitative easing couldn’t continue indefinitely. It created “potential risks for financial stability,” she said. “The longer the program continues, the more we need to monitor those risks.”
Some critics have suggested that bubble-like conditions already exist in parts of the bond market, the stock market, and the real-estate market. Yellen pushed back against this idea, saying she didn’t see any evidence of misalignments of prices in major asset markets, and then qualified herself a bit, adding, “at least to the level that threatens financial stability.” Asked about the stock market in particular, she said that if you looked at standard valuation metrics, such as the price-to-earnings ratio, “you would not see stock prices in territory that suggests bubble-like conditions.”
Yellen’s argument is a defensible one, but there are unmistakable signs of frothiness—from the Twitter I.P.O., to the record sales in the art market, to the price of Brooklyn brownstones. For those of us who worry about these things, Yellen did offer some reassurance by explicitly disavowing Alan Greenspan’s dangerous idea that the Fed should largely ignore bubbles as they are created and simply concentrate on mopping up after they burst. “I think it is important for the Fed, hard as it is, to attempt to detect asset bubbles when they are forming,” she said. And she also stated explicitly that were she to identify a bubble, she would take actions to lance it, even though doing so could make her very unpopular.
This statement came during an extraordinary exchange with Senator Bob Corker, a Republican from Tennessee who has criticized the Fed for failing to focus sufficiently on inflation, and who frequently clashed with Ben Bernanke during his appearances before the Banking Committee. Rather than tearing into Yellen, whose policy recommendations are practically indistinguishable from her those of her predecessor, Corker began by drawing attention to the nominee’s oft-ignored hawkish side, giving her the opportunity to point out that, during her long tenure at the Fed, she has voted for interest-rate increases more than twenty times. At the end of his questions, Corker asked Yellen straight out whether she would have the courage to prick a bubble. Yellen said the Fed had a number of tools to deal with bubbles, including regulatory measures, such as restricting leverage, but also, if necessary, raising interest rates. Corker interrupted her, asking once again whether she would have the courage to do it. “I believe that I would,” Yellen said. “I believe that is the most important lesson learned from the crisis.”
That was a crucial message to convey to the markets, and to the American public. But why was Corker being so helpful? It turns out that, over the summer, Yellen had visited him in his office, giving him a chance to expound his views and offering up some of hers in return. Wrapping up his questions, Corker thanked the witness for her openness and candor, and also “for giving the same answers now that you gave in the office.”
The first woman to run the Fed isn’t just a highly trained economist and a good communicator; evidently, she’s also a pretty savvy politician.
Original Article
Source: newyorker.com
Author: John Cassidy
No comments:
Post a Comment