President Obama’s press conference on Thursday was something of a horror show. By contrast, the confirmation hearing of Janet Yellen, the president’s nominee to be the next Chair of the Federal Reserve, was more like something from the Rocky Horror Picture Show. The general theme of the three-hour session was Damn it, Janet. I love you!
The Senate remains a remarkably politicized place. Tea Party rogues like Ted Cruz of Texas and Mike Lee of Utah are gumming up the works. Republicans are filibustering Obama judicial nominees. And a grand bargain on taxes and spending remains elusive as ever. But at the Yellen hearing, the members of the Senate Banking Committee signaled that they essentially accept the status quo. Several senators posed objections and concerns about the Fed’s quantitative easing policies, but few signaled discomfort with the prospect of the first woman nominated to head the central bank taking charge. And none indicated he or she would try to block a vote.
In her brief opening statement, Yellen signaled that she was essentially prepared to stay the course of keeping short-term interest rates low and creating new money to purchase bonds to keep long-term interest rates low. “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” she said.
Now, in recent years, the Fed’s expansive monetary policies have been extraordinarily divisive. Remember Texas Gov. Rick Perry’s comments that Ben Bernanke’s efforts to stimulate the economy could be construed as “treasonous”? The Republican Party has a large Situational Hard Money Caucus—a group that freaks out at the prospect of inflation when the Federal Reserve keeps interest rates low during a Democratic presidency, but didn’t blanch at low-interest rates during the Bush administration.
Yellen was present at the creation of quantitative easing, and is pledging to continue the policy until it works. But she didn’t get all that much flack about it. The objections to quantitative easing were generally pro forma and not particularly articulate. Sen. Mike Johanns of Nebraska acknowledged the struggles of the economy but bizarrely suggested the Fed should consider getting rid of all its holdings over a 24-month period. He didn’t explain why the dumping of $4 trillion in assets would help economic growth. Sen. Pat Toomey of Pennsylvania, who used to work at the Wall Street-oriented Club for Growth, complained that interest rates were too low for savers, but that Dodd-Frank and other regulations were raising costs for corporate borrowers. (Note: thanks to the Fed’s quantitative easing efforts, corporate borrowers are paying next to nothing to borrow. In May, IBM sold $1.2 billion in seven-year bonds at an interest rate of just 1.625 percent.) Sen. Richard Shelby of Alabama tried to catch Yellen in a gotcha. Republicans have tried for the last several years to make it seem as if quantitative easing is a tool of the hard left. When Yellen noted to Shelby that quantitative easing had been supported by conservative icon Milton Friedman, Shelby asked: “What about Keynes?” The response: “I don’t know that Keynes thought about that.”
Of course, there are grounds for skepticism of the Fed’s policy. We’re not sure how it all ends, and the benefits certainly aren’t trickling down to all sectors of the economy, as many senators noted. I never thought I’d see the day when a Republican Senator from a poor state with no income tax would lecture a Berkeley Professor about the failures of trickle-down economic policies. But that’s precisely what Sen. Bob Corker did in his question session.
For their part, Democrats seemed to want to talk about everything but quantitative easing and monetary policy. They expressed concern about unemployment and the behavior of big banks. A few lobbed softballs. Sen. Chuck Schumer of New York: “I think you’ll make a great chair, and your Brooklyn wisdom shines through.” But one of the toughest questioners was Sen. Elizabeth Warren, who (correctly) went right after Yellen and the Fed for being asleep at the regulatory switch during the credit bubble, and for generally being as enthusiastic about regulation as kids are about eating cauliflower. “Do you think the Fed’s lack of attention helped lead to the crash?” Warren asked.
For her part, Yellen was calm and composed. She seemed much more at ease in front of the microphones than Ben Bernanke, who seemed to fumfer in front of even the most friendly audiences. She did differ from her predecessors in a couple of important respects. It’s been a big source of frustration for me, and for many other observers, that Bernanke didn’t use his Congressional appearances to get into legislators’ faces about their corrosive and damaging policies. The economy needs assistance from two engines—monetary policy and fiscal policy. But in the past few years, while the monetary engine has been revving in its highest gear, the fiscal engine has been stuck in reverse. The sequester, austerity, a failure to pass an infrastructure program, the debt ceiling brinkmanship and the shutdown—all these have helped tamp down demand, reduce employment, and generally sandbag economic growth. And while Bernanke would throw oblique language into his statements and speeches about fiscal headwinds and challenges, he never told Congress to knock it off. Yellen was a little more direct. She said that fiscal policy has been a drag on the U.S. economy, and that Congressional inaction has made it harder for the Fed to be effective. A fiscal policy that “did no harm would make life easier,” she noted.
There was one other promise of a slight departure from recent precedent. Too frequently over the past quarter century, the Federal Reserve—especially under Alan Greenspan—conflated the markets with the economy. Too often, the Fed has made policy to mollify short-term action in the stock and bond markets and presumed that if the markets were healthy the economy would cruise along. But that created a dysfunctional feedback loop in which the Fed repeatedly bailed out investors, which would cause investors to behave as if they were going to be bailed out, which would necessitate further Fed bailouts. Yellen offered a hint that she might try to break this cycle. She noted that “we do have to take into account what is happening in the markets.” But, she promised, “overall, we are not a prisoner of the markets.”
That remains to be seen. Conditioning the Fed to react less to periodic market tantrums will take a strong will. And if Yellen is serious about this, she may have some difficult choices in the years to come. Sen. Joe Manchin of West Virginia, who doesn’t know much about monetary policy, gave Yellen perhaps the best advice: “Be Bold!”