Janet Yellen, the nominee for the future chairman of the Federal Reserve (Fed), faced the Senate Committee for Banking last Thursday. She testified at the hearing in strong favor of continuing the Reserve’s policy of economic stimulus, otherwise known as Quantitative Easing, or QE.
If appointed, Yellen, a former economic professor at Harvard and the current vice chair at the Fed, would become the first female Chairman of the Reserve and consequently the most powerful woman in the history of finance. Globally, she would be working alongside Christine Lagarde, the Managing Director of the International Monetary Fund (IMF).
Current Chairman, Ben Bernanke prepares to resign in January and amid market fluctuations and uneasiness, Yellen, as his successor was very direct in stating that if appointed chairman she would not halt the Fed’s monetary policy until the current market stabilizes and the economy demonstrates sustained job creation.
“I consider it imperative that we do what we can to promote a very strong recovery,” Yellen told the committee.
The current cost of the QE is around $85 billion dollars a month. The Fed has maintained interest rates at nearly zero percent since the market crash of 2008 and has spent over $3.8 trillion dollars purchasing bonds since the policy began, which quadrupled its balance books. However, Ms Yellen asserted that the economic benefits of this program far outweigh the potential costs in its absence.
According to the Financial Times, Yellen did not give any indication as to when the Fed might begin slowing its purchasing of assets. Though unemployment numbers have improved, the current labor market stands at 7.3 percent, which Yellen said was “far short” of its potential. She asserted that there was “no set time” for tapering the stimulus, though Fed officials were currently accessing the possibility.
Republicans at the hearing expressed concern about the costs, effectiveness and potential market risks of the current QE policies. Mike Crapo, the leading Republican on the committee questioned Yellen, “If the labor market doesn’t improve to the point that you reach your target, how long can this continue?”
“It cannot go on forever,” responded Yellen. “There are costs and risks associated with the program.” Ben Bernanke has repeatedly given similar assertions that the policy has to stop at some point, yet the Fed has committed four consecutive rounds of QE.
With committee Democrats unanimously supporting Yellen’s confirmation and with no indication that Republicans will oppose, it seems very likely that she will be appointed.
However, Senate Democrat Elizabeth Warren, a former Harvard law professor herself and supporter of Yellen’s nomination, did not promise her vote without issuing a caveat.
Warren stated on record that it was the Fed’s lack of regulatory responsibility that helped precipitate the 2008 financial crises, and that banking regulatory policies were just as important as stimulus for ensuring a stable economy, reported Business Insider.
“We need to devote just as much attention… to regulatory policy as we do monetary.” Yellen agreed. Warren seeming pleased with the discourse, closed her comments saying “engaging in supervisory and regulatory responsibilities that help keep our financial system safe – that can’t just be an afterthought but a primary effort on your part.”
Quantitative Easing is the monetary policy by which the Federal Reserve prints money in order to purchase assets from private financial institutions for the purpose of stemming interest-rate inflation. However, the risk of excessive money printing in any economy (without a standard representation in precious metals) risks the possibility of currency deflation.
USA Today explains: “the policy of Quantitative Easing is the technical term for the Federal Reserve’s policy of buying bonds and other assets in order to push more money into the economy. The most recent strategy, called QE3, had the Fed buying $85 billion of bonds every month. The bank has said it will phase out those purchases as the economy improves. The Fed hoped to drive up the supply of money available for loans, driving down long-term interest rates so more people would buy and build homes and invest in businesses.”
The possibility of a stop to QE has consistently rattled markets since it was first instituted. The stock market has declined preceding the declaration of each round, signifying that financial institutions and investors have become somewhat reliant on the policy for their security. Before Yellens hearing, markets slowed and again rose with confidence after.
Never has a fiscal strategy quite like this been enacted in a fiat currency (money printing without a standard) economy. No expert can predict with a certainty as to what the outcome will ultimately be. But for now, there is no end in sight for this pioneering policy.