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Yellen's record-low Senate support reflects Fed's politicization

Jan 7, 2014 @ 9:24 am

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(Bloomberg News)

Janet Yellen's confirmation as chairman of the Federal Reserve with the least Senate support on record shows that the central bank still faces intense political scrutiny six years after the financial crisis.

The Senate vote of 56-26 to confirm Ms. Yellen means she garnered even less support than outgoing Chairman Ben S. Bernanke, whose 2010 confirmation for a second term by a vote of 70-30 represented the most opposition for a Fed chief. Mr. Bernanke's term ends Jan. 31.

Ms. Yellen takes over a Fed with a $4.02 trillion balance sheet bloated by a quantitative easing program, undertaken to pull the nation out of the deepest recession since the 1930s, that sparked strong Republican criticism. Crisis-era bailouts of financial firms, including American International Group Inc., exposed the Fed to charges it overstepped its authority.

“In the current political environment it's probably unrealistic to expect things to cool off,” said Roberto Perli, a partner at Cornerstone Macro in Washington and a former Fed economist. “The Fed was forced by the circumstances of the crisis to take a series of controversial actions, not just QE, but the whole crisis response, the bailouts, the facilities they put in place for banks and nonbanks.”

Ms. Yellen, 67, the first woman to head the Fed, will preside over an unwinding of the central bank's unprecedented stimulus program if the economy performs as forecast. The Fed took the first step toward the exit last month when it reduced the monthly pace of asset purchases to $75 billion, from $85 billion, citing evidence of improvement in the labor market.

ASSET PRICES

The Fed's Republican critics say its bond purchases risk creating asset-price bubbles and eventually stoking inflation, even though price increases remain subdued. The personal consumption expenditures index, the Fed's preferred gauge of inflation, rose 0.9% in November from a year earlier and has stayed below the central bank's 2% objective for 19 months.

“The stock market has become addicted to the Fed's easy-money policies,” Sen. Charles Grassley, R-Iowa, who voted against Ms. Yellen, said Monday on the Senate floor. “The benefits to Main Street have been questionable at best.”

Such skepticism from Congress “means the Federal Reserve leadership is going to have to spend more time talking to the public and talking to Congress about what it's doing,” Lewis Alexander, chief U.S. economist for Nomura Holdings Inc. in New York, said in an interview on Bloomberg Radio.

MAINTAINING RELATIONSHIPS

Mr. Bernanke, in a Jan. 3 speech in Philadelphia, said he was surprised by the amount of energy he's had to devote to maintaining relationships with Congress beyond the twice-yearly testimony required by law.

“I had not entirely anticipated,” he said, “that I would spend so much time meeting with legislators outside of hearings — individually and in groups.”

He added: “I quickly came to realize the importance of these relationships with legislators in keeping open the channels of communication.”

In his final press conference last month, Mr. Bernanke said Ms. Yellen should keep in mind that “Congress is our boss.”

Not all 100 senators were present to vote on Ms. Yellen's nomination, as arctic weather kept many from returning to Washington. In a procedural vote last month, Ms. Yellen advanced 59-34, compared with 77-23 for Mr. Bernanke in 2010. In 2006, Mr. Bernanke was confirmed by a voice vote.

FED POWERS

The financial crisis focused congressional attention on the Fed's powers, providing ammunition to critics from both political parties opposed to bailouts of financial firms. A majority of Americans in a December 2010 Bloomberg National Poll saying they wanted the Fed either brought under tighter political control or abolished outright.

The Dodd-Frank Act of 2010 curtailed the Fed's emergency-lending authority, and forced it to disclose details of bailout programs. The act stated in its preamble that it would “protect the American taxpayer by ending bailouts.”

A draft of that legislation from Sen. Chris Dodd, D-Conn., who led the Senate Banking Committee, would have stripped the Fed of almost all its bank supervision authority. Sen. Dodd retired from the Senate in 2011.

Mr. Bernanke and several of the Fed's regional bank presidents went to Capitol Hill to argue for maintaining the Fed's supervisory role. They ultimately succeeded, even though many of their consumer regulatory powers were transferred to a new Consumer Financial Protection Bureau.

The Fed has also faced recurring proposals from former Texas Rep. Ron Paul and his son, Kentucky Sen. Rand Paul, both Republicans, to open monetary policy-making to congressional scrutiny. Bernanke has opposed the proposals, saying they would infringe on central bank independence.

Texas Republican Jeb Hensarling, chairman of the House committee that oversees the Fed, last month said he plans “the most rigorous examination and oversight of the Federal Reserve in its history” with a series of hearings over the coming year. The next session, scheduled for Jan. 9, will be dedicated to the international impact of bond buying by the Fed.

Senators from both parties have blamed the Fed for its role in the runup to the housing crisis. During Mr. Bernanke's hearing for reconfirmation, Sen. Dodd said the Fed failed to develop meaningful mortgage regulations before the housing bubble burst, and Alabama Republican Richard Shelby said it held interest rates too low for too long, inflating the bubble.

JOBLESS RATE

Since then, the central bank's policies have also been criticized as ineffective or insufficient to bring unemployment down more quickly. The jobless rate stood at 7% in November. Although the lowest in five years, the rate remains well above the 4.4% rate seen in 2007 and above the Fed's own estimates for maximum employment.

Still, unemployment is down from 10% in October 2009, and 7.4 million jobless Americans have been put back to work since early 2010.

Mr. Bernanke said last week in Philadelphia the headwinds that have held back the world's largest economy may be abating, and the U.S. is poised for faster growth. Mr. Gross domestic product climbed at a 4.1% annualized rate in the third quarter, the strongest since the final three months of 2011.

As the economy improves, the Fed is forecast to keep cutting the pace of bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, according to the median forecast in a Dec. 19 Bloomberg survey of 41 economists. The Federal Open Market Committee is scheduled to meet Jan. 28-29.

“A lot of the hard work has already been done,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Ms. Yellen is “going to come in like a relief pitcher and kind of finish off a pretty strong seven innings from Bernanke.”

Mr. Bernanke has quadrupled Fed assets since 2008 by purchasing Treasury and mortgage securities to push down long-term borrowing costs and reduce unemployment. Ms. Yellen, the central bank's No. 2 official since 2010, has been a consistent supporter of the policy.

As the Fed moves toward the exit, Ms. Yellen will have to communicate how to end bond buying and raise the main interest rate from near zero without disrupting financial markets.

“There's a lot of uncertainty about how monetary policy exit will occur with a very large balance sheet,” New York Fed President William C. Dudley said during a Jan. 4 panel discussion in Philadelphia. “There's no question that there could be unintended consequences.”

(Bloomberg News)

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