The Senate Banking Committee held a confirmation hearing for Janet Yellen this morning, who has been nominated to be the 15th Chair of the Federal Reserve (and the first woman). Though Fed chairman and candidates for the position are usually at pains to say as little as little as possible of substance during these public exchanges, this two-plus hour hearing did shine some light on where Yellen’s priorities are and what we might expect from her chairmanship. Here are three takeaways:
1. ‘Too Big To Fail’ banks should be afraid, very afraid: Big Wall Street banks know that they’re not well-regarded around the country, but they’re usually able to keep that populist anger at bay with lobbyists who keep tabs on both lawmakers and the regulatory rule making process. But today’s hearing shows that these large institutions aren’t totally out of the woods yet. Senators from both sides of the aisle expressed concern that we still haven’t dealt with the problem of too-big-too fail, and the subsidy big banks get from lenders who assume that they will bailed out by the federal government if anything goes wrong.
Senator Vitter, a Republican from Louisiana, for instance, reiterated his desire to see the capital standards on the largest banks raised in order to reduce the need for federal intervention in a crisis, and to level out the playing field between the largest and smaller banks.
Yellen agreed that large banks are still getting a subsidy from the marketplace, and that “Addressing too-big-to-fail has to be one of the most important goals of the post-crisis period.” With higher capital requirements on the largest, systematically important banks still to be decided upon, the emphasis placed on this issue both by lawmakers and Yellen says a lot.
2. Yellen isn’t too afraid of Quantitative Easing’s risks: In her statement, Yellen paid lip service to the idea that the Fed’s long-term bond-buying program poses risks towards financial instability, but her statements in the hearing indicate that she believes the benefits of QE far outweigh the side effects. She argued that the Fed’s “first line of defense” against financial instability should be regulations, like instituting higher capital requirements, rather than tighter monetary policy.
3. But that doesn’t mean Yellen is an inveterate dove: One of the most interesting exchanges of the morning was between Yellen and Senator Bob Corker of Tennessee. Corker has long been a critic of the Fed’s recent monetary policy, but he began his questioning of Yellen by asking how many times she had voted for increases in interests rates during her long career as a Fed official. The answer? 27 times! Corker obviously was asking the question to underscore the point that Yellen can be a dedicated proponent of tighter monetary policy when economic conditions call for it — as they often did in the 1990s and 2000s.
This point also illustrates an idea Yellen repeatedly tried to emphasize, which is that while right-leaning folks may intuitively distrust an activist Fed trying aggressively to push down interest rates and encourage spending, standard economic logic dictates that this is exactly what we should be doing under current circumstances. Unemployment is high and inflation is low. And even though the stock housing markets have risen swiftly in recent months, by most measures they aren’t significantly overvalued. By these measures, there’s not much of an argument for the Fed to shift course, but Yellen’s history shows that she’s willing to do so if the conditions on the ground change.