Federal Reserve vice chairwoman Janet Yellen is a few hours into her grilling by the Senate banking committee, which is part of the process that will most likely confirm her as the first-ever female head of the Federal Reserve. That would make her not only the most important person in finance, but arguably the most important person in the world right now—at least if you measure that position by the ability to fix the economic and employment issues facing the U.S., which is still the world’s largest economy.
So far in her testimony, Yellen has made it clear that unemployment is where her focus is. Speaking to the record number of long-term unemployed in the US, she said, “We know that those long spells of unemployment are particularly painful for such households.” Which is one of the reasons she still believes that when it comes to the Fed’s record $85 billion a month asset buying spree, “the benefits exceed the costs.” Asked about the risk of market bubbles from continuing this kind of monetary stimulus for too long, she said, “I would agree that this program cannot continue forever” and that the Fed takes risks to financial stability “very seriously.” Still, she’s made it as clear as possible from her comments that we shouldn’t look for a hasty tapering of asset buying, despite fears that it’s distorting the global economy.
That speaks to a point that I’ve made often, which is that in lieu of any real job oriented fiscal policy coming out of Washington, the Fed has become the economic stimulator of last resort via monetary policy. One of the reasons that “quantitative easing” as the asset buying program is called, has gone on so long is that Ben Bernanke (and Yellen) believe that monetary policy can substitute for fiscal policy to a certain extent in terms of propping up unemployment. And given the dysfunction in Congress, he clearly felt he was the last man standing in Washington who could actually do something about jobs.
What’s interesting is that there are now indications that the Fed’s influence is moving into broader areas of the economy beyond just monetary policy. Last week, New York Fed president Bill Dudley made a speech on what he called “deep-seated cultural and ethical failures at many large financial institutions,” and presented potential policy solutions for the Too Big To Fail problem. This kind of frank talk has been in the past nearly unheard of from Fed heads. But given Congressional failure to properly re-regulate finance, the Fed has begun to sound off more loudly on that issue, as well.
More significantly, Boston Fed president Eric Rosengren recently announced the bank’s involvement in a community development program across Massachusetts to revitalize a bunch of old Rust Belt cities, bolstering new business development and offering up prizes for more collaborative government. While the Fed has always had a technical mandate to help in economic development, going out and doing community building at the grassroots level is, once again, a very unusual and important step for the Fed to take. And the focus on better community governance makes a particularly strong political statement given that there’s so much government dysfunction at the national level – which is, as I said above, one of the key reasons that the Fed has had to take what Yellen referred to her in testimony today as “unprecedented action” to stimulate the economy via QE.