Factbox: Yellen policy positions to face Senate scrutiny

Fri Nov 8, 2013 1:05pm EST

U.S. Federal Reserve Vice Chair Janet Yellen, President Barack Obama's nominee to succeed Ben Bernanke as chairman, arrives to meet with Senator Charles Schumer (D-NY) in his office on Capitol Hill in Washington, November 7, 2013. REUTERS/Jonathan Ernst

U.S. Federal Reserve Vice Chair Janet Yellen, President Barack Obama's nominee to succeed Ben Bernanke as chairman, arrives to meet with Senator Charles Schumer (D-NY) in his office on Capitol Hill in Washington, November 7, 2013.

Credit: Reuters/Jonathan Ernst

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(Reuters) - Federal Reserve Vice Chair Janet Yellen's long career as a policymaker and economist will be under scrutiny next Thursday as the U.S. Senate Banking Committee vets her nomination to replace Fed Chairman Ben Bernanke, whose term expires on January 31.

Here is a snapshot of some of the key topics senators will seek to examine and what she has said on the issues:

TOO DOVISH?

Republican critics of the Fed's ultra-easy monetary policy worry she is simply too dovish to trust with protecting the dollar and preventing future inflation.

Yellen believes the high cost of long-term unemployment could warrant allowing inflation to temporarily rise above the Fed's 2 percent goal to drive down the jobless rate faster.

"With employment so far from its maximum level and with inflation running below the Committee's 2 percent objective, I believe it's appropriate for progress in the labor market to take center stage in the conduct of monetary policy," she said on March 4.

However, she can also argue that she has hawkish credentials as one of the few Fed officials who had the nerve to stand up to then-Fed Chairman Alan Greenspan back in 1996, when she urged him to consider raising interest rates to head off inflation.

QE

The Fed's bond-buying program, or quantitative easing, has quadrupled the central bank's balance sheet to $3.8 trillion and will be under attack from Republicans who fear it could stoke financial instability and lead to inflation.

Yellen voted to continue purchasing assets at an $85 billion monthly pace in October and her remarks on the costs and benefits of maintaining the program will be studied closely for any sign she favors winding it down soon, particularly in light of a surprisingly strong report on job creation for October.

Yellen has been a strong supporter of QE and believes it has helped the economy with few side effects.

"I believe that the Federal Reserve's asset purchases and other unconventional policy actions have helped, and are continuing to help, fill this gap and thus shore up aggregate demand," she said on February 11, referring to the constraint monetary policy faces with overnight rates already near zero.

FORWARD GUIDANCE

The Fed is trying to spur growth and hiring by holding down long-term borrowing costs by promising not to begin raising rates at least until the U.S. unemployment rate drops to 6.5 percent, provided the outlook for inflation remains under 2.5 percent. The jobless rate in October was 7.3 percent.

A paper last week by senior Fed staff economists argued in favor of lowering the unemployment threshold. Some analysts took it as a hint officials would trim the threshold to 6 percent, and Yellen could be asked for her views.

She could also be asked directly when she thinks the Fed should start to raise interest rates. She is likely to fall back on the central bank's most recent quarterly forecast showing 12 of 17 officials think the first hike will be in 2015.

Yellen does see forward guidance as a useful policy tool.

"Committing to keep the federal funds rate lower for longer helps bring down longer-term interest rates immediately and thereby helps compensate for the inability of policymakers to lower short-term rates as much as simple rules would call for," she said on March 4.

ASSET BUBBLES

One criticism of the Fed's ultra-easy policy stance is that it could inflate another asset bubble. Yellen conceded in remarks on April 16 that with rates near zero since late 2008, some investors were "reaching for yield." But she did not think this concern was reason to ease up on efforts to spur growth, or that policy should be tightened to prick the next bubble.

"I think most central bankers view monetary policy as a blunt tool for addressing financial stability concerns and many probably share my own strong preference to rely on micro- and macroprudential supervision and regulation as the main line of defense," she said.

TOO BIG TO FAIL

Some senators will press her on whether she thinks more needs to be done to rein in big banks and avoid another situation where taxpayers could be on the hook to bail them out.

Yellen has been vague on her views, but has indicated she is open to making banks hold more capital to absorb losses.

"It may be appropriate to go beyond the capital surcharges put forward by the Basel Committee ... fully offsetting any remaining too-big-to-fail subsidies," she said on June 2.

She does not, however, sound open to breaking up the biggest banks, as some Democratic senators, including banking committee member Elizabeth Warren from Massachusetts, have advocated.

"I am not persuaded that such blunt approaches would be the most efficient ways to address the too-big-to-fail problem."

(Reporting By Alister Bull; Editing by Andrea Ricci)

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