During a two-hour confirmation hearing before the Senate Banking Committee, Yellen embraced her “dovish” reputation and expressed strong support for the Fed’s low-interest-rate policies. And she warned critics that any potential harm those policies pose are outweighed by the risk of leaving a still-weak economy to survive without them.
“I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” she said.
Yellen faced tough questions, particularly from Republicans. But she also drew praise from senators in both parties and is expected to be confirmed by the full Senate, becoming the first woman to lead the central bank.
A committee aide said that Banking Chairman Tim Johnson (D., S.D.) plans a vote as soon as possible, potentially next week.
“We have the utmost respect for you,” Sen. Joe Machin, a centrist Democrat from West Virginia, told Yellen.
Her testimony represented a strong defense of the Fed’s policies pursued under Chairman Ben Bernanke, which were launched to combat the recession and financial crisis.
The latest efforts include spending $85 billion a month on bond purchases, which are intended to lower long-term interest rates and promote faster economic growth.
The Fed has also said it plans to keep its key short-term rate near zero at least until unemployment falls to 6.5 percent. The rate is now 7.3 percent.
Some Republicans expressed concerns at the hearing about the bond purchases, which have swelled the Fed’s balance sheet to $3.8 trillion. They are worried that the money flooding into the financial system is inflating stock and real estate prices. And that could be creating asset bubbles, which would have a disastrous impact on the economy if they burst.
“I think the economy has gotten used to the sugar you have put out there and I just worry that we are on a sugar high. That is a very dangerous thing,” said Sen. Mike Johanns (R., Neb.).
Yellen repeatedly assured senators that the Fed is mindful of those risks. But she cautioned that there were other dangers if the Fed pulled back prematurely. The economy could weaken further and unemployment could rise.
Pressed by Republicans to specify when the central bank might begin scaling back the bond purchases, Yellen said Fed policymakers assess the risks and benefits of the bond purchase program each time they meet.
The Fed has said that it wants to see stronger data before it reduces the stimulus. Recent reports have been encouraging.
Yellen told senators that the economy has regained ground lost to the recession. But it still needs the Fed’s support because unemployment remains too high.
She also praised Bernanke for his “wise and skillful leadership.”
The Fed has a dual mandate to keep inflation low and fight unemployment.
Private economists viewed Yellen’s comments as a strong signal that Bernanke’s policies would continue.
Source: Associated Press