President Barack Obama’s nominee for Federal Reserve chair appeared before the Senate banking committee on Thursday.
She mounted a vigorous defence of the Federal Reserve’s quantitative easing policy as she faced lawmakers in her first big test of political and communications skills.
Gina Chon and Shannon Bond reported from New York with James Politi in Washington.
As we wait for the hearing begin, we know Yellen will say the US has farther to go to regain the ground the US has lost. Here’s our story on her testimony.
Yellen has just walked into the Senate hearing room.
Senator Tim Johnson, Chairman of the Senate Banking Committee, goes through Yellen’s impressive bio. He notes she was “the first, in 2008, to say that the economy had fallen into a recession.”
The top Republican on the committee, Mike Crapo, is next. He voted against her nomination as vice chair of the Fed in 2010.
Crapo says he has been a critic of the Fed. And it’s important to know how Yellen would “normalise” monetary policy. He’s the first of several Republicans who will bring up that question.
Crapo also wants to know how Yellen would fix Dodd-Frank financial regulation. The House has been in the lead in trying to roll back that legislation.
Johnson, the committee chair, says other senators won’t be allowed to make opening statements in the interest of time. Journalists breathe a sigh of relief.
Yellen begins her opening statement. She is dressed in black and sitting alone at the hearing table.
Yellen says the financial crisis could have been worse. She credits the “wise and skilled leadership” of her would-be predecessor, Ben Bernanke.
She says unemployment is too high while inflation is below the Fed’s goal. Market watchers will be trying to parse her tone and body language on tapering signs.
Yellen gives a nod to the bank’s communication issues. She says the Fed’s monetary policy works best when public understands what it is trying to do.
Yellen praises capital, liquidity rules to address “Too Big to Fail”. But she says community banks are too burdened with regulation. Music to lawmakers’ ears.
Yellen is done with her opening statement. Now to the good part: the questions. First up is Chairman Tim Johnson, who asks how she would address unemployment, especially among young people.
Yellen notes 36 percent of the unemployed have been without a job for at least six months, which is unprecedented. She cited Fed’s bond-buying programme as a way to help. Republicans won’t like that.
Johnson tries to preempt Republican criticism, asks about dangers of tapering bond purchases too early. Yellen notes there are dangers on both sides: tapering too early or not in time.
She says it’s important to not remove support too early given the fragile recovery.
Quartz has a bingo card for Yellen’s hearing:
Now it’s Crapo, who already noted he is a critic of the Fed. He says Fed balance sheet will reach 20 per cent of GDP and hasn’t contributed to growth. He asks whether the Fed’s stimulus has really done anything.
Yellen says the bond-buying programme has contributed to meaningful growth, pushing down longer-term interest rates.
She also notes improving housing and auto sales. But Crapo isn’t satisfied and asks how long Fed can keep this artificial rate going.
Yellen says QE can’t go on forever in response to Crapo’s questioning. But she does not give a specific answer on timing.
Crapo tries to press her on timing. Yellen says at each meeting, Fed is attempting to assess labour market, growth that is strong enough to continue progress.
But Yellen says there is no set time.
Now it’s on to Bob Menendez. He wasn’t part of the Yellen cheerleaders on the committee but he is a Democrat.
Menendez asks whether weak demand is the real problem. Yellen agrees, saying it’s a real drag but low interest rates are helping.
Meanwhile, the Fed’s Twitter account is following the chairman on his speaking tour:
Menendez also asks about asset bubbles. Yellen says it is the Fed’s job to detect that phenomenon. Adds that she doesn’t see evidence of misalignment of prices.
Yellen says she wouldn’t rule out using Fed tools to address misalignment. But she notes they are blunt tools.
Now Republican Richard Shelby is up. He also voted against her in 2010.
Shelby presses her on the unprecedented nature of the Fed’s stimulus program. Yellen acknowledges it’s the first time in history, although other central banks have followed similar paths.
Shelby also says “quantitative easing” is a made-up term.
Shelby talks about China buying US bonds. Asks Yellen if it’s true that it’s actually the US that is buying its own paper.
Yellen says the Fed is not aiming to help the government out with its deficit. But notes once the interest rate hit zero, the Fed had to look at alternate measures.
Shelby asks what is the real unemployment reflected in people giving up looking for work. He cites 13 or 14 per cent.
Yellen acknowledges his point, saying there is a significant decline in labor force participation.
Shelby now switches to Basel III and capital standards, asks how important it is. That’s an easy one for Yellen. She notes it’s extremely important and adds that the most systematically important firms will be asked to hold even more capital.
Shelby goes back into history, asking what Yellen has learned from her time at the San Francisco Fed. Yellen says she has drawn the appropriate lessons, trying to identify the threats.
Sherrod Brown begins questioning. He was part of a letter writing campaign that gathered senator signatures to support Yellen when Lawrence Summers, the former Treasury secretary, was still a candidate.
Brown is a big critic of Wall Street. Says he is worried that Fed’s policy doesn’t benefit Main Street. Asks how Fed can benefit people in Cleveland (Brown is from Ohio).
Yellen says it’s true that in the beginning, the Fed policies affect housing and auto prices through interest rates. Says that does spread to other Americans but she hopes to generate more growth to affect all Americans.
Brown notes comments that Too Big to Fail still exists. He is the co-sponsor of a bill aimed at addressing that issue.
Yellen says she agrees addressing Too Big to Fail is among the most important goals, noting it’s damaging and creates moral hazards. She says we are making progress through the Dodd-Frank mandates.
Yellen brings up the long-term debt proposal as part of a bank’s resolution plans. It’s one of Fed Governor Daniel Tarullo’s pet project but details haven’t been released yet.
Committee member Chuck Schumer – a Democrat from New York – is enthusiastic about Yellen:
Brown also asks whether Too Big to Fail is a subsidy for the largest banks. Brown has asked the Government Accountability Office to study that issue. Yellen says most studies substantiate that.
Senator David Vitter continues with the Too Big to Fail theme. Though he is a Republican, he has teamed up a lot with Brown on bank regulation issues.
He notes a GAO report coming out today that tallies the government’s assistance to banks during the financial crisis.
Vitter moves on to leverage ratios, saying what regulators have proposed isn’t enough. Yellen says there will be meaningful improvement in capital standards.
Yellen says a “belt and suspender” kind of approach is what they are trying. Better to not be caught with your pants down. She doesn’t commit to supplemental leverage ratios, says it’s better to wait until Dodd-Frank rules are written.
Vitter asks whether Yellen would support Rand Paul’s Fed transparency bill that would audit the Fed. Yellen says she supports transparency but not anything that would diminish the Fed’s independence.
Paul has threatened a hold on Yellen’s nomination unless he gets a vote on his bill.
Our colleagues at Fast FT have this markets update:
The S&P 500 is up 0.3 per cent at 1787, 5 points higher than the record it hit on Wednesday. The benchmark 10-year Treasury yield is at 2.71 per cent, down 2 basis points from when Ms Yellen entered the hearing.
Democrat Jon Tester now turns to Fed’s involvement in an international insurance board. Yellen notes the Fed will have to regulate insurance companies that are designated systematically important.
Tester asks about Financial Stability Oversight Council’s regulation for insurance and asset managers. Yellen says “one size fits all” isn’t a good policy. Insurance companies and asset managers have fought the additional regulations.
Tester also criticises FSOC’s lack of transparency. He sounds like a Republican. Yellen says she has not participated in an FSOC meeting yet.
James Politi writes on FT.com:
Ms Yellen generally struck a dovish tone, speaking about the troubling effect of long-term unemployment after the first question from Tim Johnson, the Democratic chairman of the committee and reiterating her commitment to lowering unemployment further while keeping inflation under control.
Ms Yellen said that the Fed policy was “not on a set course” but did not offer any clues about whether the central bank might start slowing – or tapering – the pace of asset purchases. After a strong jobs report for October, some economists believe the Fed could make such a move as early as December, but most expect that moment will not come until early next year.
Here’s a breakdown of Yellen’s financial holdings:
Senator Mark Kirk also brings up insurance regulations. He asks for a cost-benefit analysis on insurers having to change their accounting practices. Insurance firms have large lobbying operations in DC and in the states.
Virginia’s Mark Warner says he is also disappointed in FSOC. Interesting to see Democrats go after the council. The FSOC is in the process of reviewing asset managers and this criticism could affect that debate.
Senator Dean Heller asks Yellen a random question on gold prices and what drives the market.
In response to another Heller question, Yellen says the financial system is safer and sounder but more needs to be done.
Heller also brings up the loss of community banks, making it difficult for the housing recovery. This is an issue that has bipartisan sympathy.
Interestingly, Republican Senator Bob Corker, one of the Fed’s fiercest critics – who voted against Yellen for vice chair in 2010 – has yet to make an appearance this morning.
So far, the senators haven’t really pressed Yellen on specific answers. She is skating by without giving definitive answers on tapering.
Senator Jeff Merkley asks about the Volcker rule aimed at banning proprietary trading. Regulators are putting finishing touches on it now.
The FT wrote about the Volcker rule earlier this week:
Now, finally, officials are optimistic that the rule will be delivered by the end of the year. Banks are nervous about the outcome and furious at what they say is stonewalling by the regulators.
Yellen says the Fed is trying to be faithful to the intent of the Volcker rule. But the “devil is in the details” since the rule allows for market making and hedging, which banks complain are indistinguishable from prop trading.
Merkley also asks about banks owning physical commodities, an issue the Fed is studying. JPMorgan has already said it is selling that business.
Brown’s subcommittee is having a hearing on the issue on November 20. Yellen says the Fed is going through an extensive review and may be involved in additional rule making.
Here is Bob Corker. He asks how many rate increases Yellen has voted for.
Yellen says 20 or more. Corker says its about 27 or so. Corker asked if she has voted against any rate increases and Yellen answers no.
Corker says easy money is an elitist policy, with Wall Street institutions doing the best, but it hasn’t trickled down to the economy.
Yellen says low interest rates probably boosted the stock market but it’s also played an important role in helping the housing sector. So it’s been broadly beneficial.
Corker talked about market reaction to earlier worries about tapering, saying it seemed like the Fed had touched a hot stove. He said the Fed had become a prisoner to its own policy, which Yellen disputed.
Yellen says again we are not a prisoner of the markets, and that there have been improvements in the labour market. Corker comments that maybe the Fed is a little bit of a prisoner.
Corker asks if Fed would have the courage to prick those asset bubbles, possibly in housing, to prevent another crisis. Yellen says no one who lived through the crisis would want to go through another one.
Corker has some nice things to say at the end of his questioning. He says he appreciates Yellen’s candor and transparency.
Corker’s turn is up. Senator Kay Hagan talks about the swaps push out rule that was just passed in the House to exempt certain “plain vanilla” derivatives from Dodd-Frank mandates.
Yellen says the Fed is working hard to address the concerns around the swaps push out rule and that the final proposal should address those worries. Hagan has a companion bill in the Senate to the one passed in the House.
The Senate has been reluctant to go back to any Dodd-Frank rules until the proposal writing is done. The House hasn’t had those reservations.
Hagan asks about volatility in the markets. Yellen says the Fed is trying to clearly communicate but the stimulus program is unprecedented. She also said it’s a work in progress and sometimes there is miscommunication but the Fed does want to minimise unnecessary volatility.
She adds that the Fed will redouble its communication efforts.
Now Patrick Toomey is following up on Corker’s line of questioning, criticising the stimulus and noting that middle-class savers have been punished.
Toomey asks, “what happens when this morphine drip starts to end?” He notes that the markets may not respond very well when tapering begins.
Yellen says rates will go up but acknowledges low interest rates hurt savers. She says we can’t have normal rates unless economy is “normal.” And low rates are best way to normalise the economy.
Yellen reiterates that the Fed will move at an appropriate pace, but again, doesn’t give any timing.
Toomey expresses concerns about the Volcker rule, how it could hurt corporate bond liquidity and that it possibly exempts all sovereign debt.
Congressman Patrick McHenry also wrote a letter to Treasury Secretary Jack Lew expressing concern about Volcker’s possible sovereign debt exemption.
The FT’s Joseph Cotterill weighs in:
Liberal darling Senator Elizabeth Warren says financial crisis wouldn’t have happened if regulators were doing their job.
She says it seems the Fed is also passing the buck and asks whether the Fed should meet often on regulatory issues as it does on monetary policy.
Yellen replies that the Fed does need to devote as much time on regulatory issues as it does on monetary policy. But says the Fed’s ability to get together outside open meetings is limited because of the sunshine policy.
The Fed’s Daniel Tarullo is the main official there who covers regulatory policy. There have been questions on whether he has a good relationship with Yellen, but she has been touting his policies today.
Warren asks a loaded question: Did the Fed’s lack of attention to supervisory matters lead to the crash of 2008?
Yellen says Fed has gone back and revamped its supervision processes. She says the Fed no longer delegates to individual reserve banks the supervision of one or two large banks.
Yellen says a top priority now is the monitoring of the financial system, which the Fed wasn’t doing adequately before the crisis so it missed issues with mortgages and other issues.
Senator Jack Reed of Rhode Island says Yellen already demonstrated her wisdom by going to Brown University in his home state.
Reed asks how it would affect Yellen’s job if the US fiscal policy was complementary to monetary policy. Yellen says the two policies are at odds and she recognizes the importance to reduce the US deficit.
Yellen says it would be helpful if deficit reduction addressed the US long term debt. Congress is currently going through budget negotiations and faces another possible shutdown deadline in January.
Or, another way to put it:
Reed talks about the debt ceiling fight and the impact of a default.
Yellen says a default would have been catastrophic and the Fed did see signs in the lead up to the debt limit deadline that market participants were taking preemptive action to protect themselves. She says there was also a negative impact on consumers.
Senator Mike Johanns goes back to asset bubbles, and says there are real estate bidding wars, private equity firms buying single-family houses, which was a shocker to him.
He asks, “what am I missing here?” He sees asset bubbles now.
Yellen says in real estate, the Fed is seeing private investors coming in. Las Vegas and other areas that had the biggest crashes are seeing the sharpest rise in housing prices.
She says they are watching it very carefully but she doesn’t see it as a bubble. Instead, it’s a logical market reaction.
Johanns says if tapering happened in the next 24 months, housing prices would go down and the market would be affected.
He worries that economy is used to the sugar high, which is very dangerous to the little person. Johanns also says he suspects Yellen agrees but won’t say so publicly.
Funny that Republicans who want to see tapering keep commenting on how the market would be negatively affected by tapering.
Senator Heidi Heitkamp is up now. She is the most junior Democratic senator on the committee so her turn comes after most Democrats have gone through their first chance at questions.
Heitkamp asks what Yellen has done to address income disparity. Yellen says that is a very deep problem and economists have spent a lot of time trying to understand it. But she notes many of the factors are outside the Fed’s influence.
How to quantify quantitative easing? McKinsey’s got a report out on the winners and losers:
Senator Joe Manchin says he looks at Yellen and remembers a time when the US had a balanced budget.
Manchin, a Democrat, says if the Fed’s $85bn-a-month bond-buying programme isn’t achieving its goals, why doesn’t the Fed push it to $200bn?
He asks if the budget could be balanced again the way it was in the 1990s. Yellen notes the role of Congress and President Bill Clinton in achieving that goal. In other words, it’s really up to others.
He asks Yellen to speak out more about a balanced budget. Also says the US will go into a “sugar shock” soon.
Manchin tells her to “be bold.”
Senator Chuck Schumer says the greatest problem is that middle-class incomes are declining, not just during the crisis but also in 2001-2007. He says Senator Elizabeth Warren alerted him to that issue when she was a Harvard professor back in the day.
Schumer asks Yellen how concerned she is about this since no one gives it the attention it needs. Yellen agrees it’s very serious, and says it goes back to the 1980s.
She says the Fed can’t change all those trends. But what it can do is to try to achieve a robust recovery to create jobs.
Schumer asks if the Fed didn’t do QE, wouldn’t interest rates would be artificially high? He is trying to combat Republican criticisms of a sugar high.
Schumer says Yellen’s “Brooklyn wisdom shines through.” Yellen says she never forgets her roots.
And Chairman Tim Johnson adjourns the hearing.
So Yellen handled herself well. She managed to not give any specific answers and the Republicans didn’t pursue a scorched earth policy.
Now the question is how fast will her nomination go through the Senate. She will likely get through the committee fairly quickly, but a few senators have threatened holds in the full Senate.
We’re wrapping up as well – thank you for reading. Some final thoughts from James Politi:
The hearing lasted little more than two hours, and Yellen was comfortable and confident throughout. It leaves little doubt that she will be confirmed to take over the top job at the Fed succeeding Ben Bernanke early next year.
She mounted a strident defence of quantitative easing, insisting the benefits outweighed the risks, and insisting it was still needed given that the labour market had not fully healed yet.
But she also fended off the harsher questions from Republicans by assuring them that the Fed was carefully watching any signs of rising inflation or asset bubbles and policy was not on a “set course”. She did not give any clear clues on Fed tapering but on balance it still looks like early next year is more likely than December.