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From Banking and Finance Law Daily, November 14, 2013

Yellen defends Fed’s efforts to spur economic recovery

By Katalina M. Bianco, J.D.

Janet L. Yellen, vice chair of the Federal Reserve Board, championed the use of the Fed’s “unconventional” monetary policy tools to promote a more robust economy in the wake of the financial crisis. Yellen, President Obama’s nominee for Fed chair, addressed the state of the economy and the Fed’s role in stabilizing the financial system and spurring growth in testimony at her confirmation hearing before the Senate Banking Committee on Nov. 14, 2013.

Yellen made it clear that she would continue with the Fed’s current monetary policy until assured that a stable recovery was in place. "I consider it imperative that we do what we can to promote a very strong recovery," Yellen told committee members.

Some progress made. Yellen said that there has been progress in stabilizing and strengthening the economy. The private sector has created 7.8 million jobs since the post-crisis low for employment in 2010. Housing “seems to have turned a corner,” she said, noting that construction, home prices and sales are up significantly. The auto industry has made “an impressive comeback” as well, with domestic production and sales closer to their pre-crisis levels.

Further work to do. Although good progress has been made, Yellen stressed that “we have farther to go to regain the ground lost” to the crisis and resulting recession. Unemployment is down from its peak of 10 percent but, at its current 7.3 percent, it remains too high, “reflecting a labor market and economy performing far short of their potential.” Inflation has been running below the Federal Reserve’s goal of 2 percent “and is expected to continue to do so for some time,” Yellen said.

Need for current monetary policy. Because the economy is not yet at the desired strength, Yellen said, the Fed must continue using its current monetary tools. “A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,” said the vice chair. “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

Johnson statement on confirmation. Senate Banking Committee Chairman Tim Johnson (D-SD), in his prepared statement, lauded Yellen as “an extraordinary candidate” for Fed chair. “Dr. Yellen’s nomination is especially timely as our nation struggles with high unemployment in the wake of the Great Recession. She has devoted a large portion of her professional and academic career to studying the labor market, unemployment, monetary policy, and the economy,” Johnson said.

The committee chair noted that Yellen has a proven track record in evaluating trends in the economy, saying that “her economic analysis has been spot-on.”

Crapo remarks. Sen. Mike Crapo (R-Idaho), Ranking Member of the committee, admitted that he has been a critic of some of the Fed’s monetary policies. “In recent years, the Fed has engaged in unprecedented policies, including purchasing trillions of dollars in Treasuries and mortgage-backed securities. Current Fed purchases total up to $85 billion a month,” Crapo said.

"The Fed has indicated that it will hold short-term interest rates low for an extended period. In a speech in April, Governor Yellen stated ‘the policy rate should, under present conditions, be held lower for longer.’ But how long is too long?” Crapo stated that it is “essential to know how Dr. Yellen, if confirmed, would manage the process of normalizing monetary policy.”

Crapo said that in previous hearings, he has asked current chair Ben Bernanke “what parts of Dodd-Frank could be revisited on a bipartisan basis.” He noted that Bernanke identified the end-user and swaps push-out provisions, as well as the need for regulatory relief for small banks. “Chairman Bernanke also commented in July that legislation is needed to allow the Fed flexibility to deal with the Collins amendment and tailor appropriate capital requirements for insurance companies.”

"I look forward to hearing Dr. Yellen’s views on what Dodd-Frank fixes Congress ought to consider, and how she intends to achieve an appropriate balance between prudential regulation and economic growth, if confirmed,” Crapo said.

MainStory: TopStory DoddFrankAct FederalReserveSystem FinancialStability

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