More key points from Janet Yellen’s hearing
In a nod to the volatility of the bond market over the summer, Yellen said she wants the Fed to communicate as clearly as possible with the markets and will redouble efforts to reduce volatility. This follows Bernanke, and it’s a departure from the Fed of the past, which wanted to be as opaque as possible lest the market anticipate what it was going to do, which would limit its effectiveness.
On QE and the balance sheet
Yellen was asked repeatedly about the effects of QE. She stressed that QE is undertaken to help the economy, not to help the government finance its deficit. When pressed about the size of the Fed’s balance sheet, she was forced to admit it’s unprecedented for the U.S. central bank, but it wasn’t unprecedented compared to other central banks. She acknowledged that there are costs and risks to such a large balance sheet, and she opposes any sort of Congressional audit of the Fed lest it reduce the Fed’s independence.
On income inequality
The Democratic Senators pretty much focused on income inequality and what could be done about it. Yellen acknowledged that asset prices are rising, and that this primarily benefits the rich. But the point of QE is to help the economy recover, and the best thing we can do for the middle class is have a robust economy. She also acknowledged that QE is doing a number on seniors, who rely on interest from safe assets to supplement social security. She views income inequality as a serious problem.
On the dual mandate
She stressed that the Fed must prevent inflation that’s too low, and that deflation is a terrible thing. She refused to say what she thought “full employment” was, other than to give a probable range between 5% and 6%. She also said that fiscal policy was working at cross purposes with what the Fed’s trying to do. Yellen further acknowledged that the reported unemployment rate understates the severity of the problem.