Like a doctor confronting a tricky case, the first rule for any Federal Reserve Board chair coming before Congress to talk about monetary policy is “Do no harm.” It’s a much higher bar than it sounds, given the sensitivity of the financial markets to every word out of a Fed chair’s mouth, and Janet Yellen on Tuesday cleared it with room to spare.
Making her first appearance as Federal Reserve Board chair before the House Financial Services Committee, she answered dozens of questions in a marathon hearing that lasted nearly six hours. But while Yellen avoided any major missteps and credibly defended the Fed’s strategy of gradually reducing the economic stimulus it has been providing the economy, the Republican leader of the panel warned her that in the coming year she will have more to worry about than the financial markets and the economy.
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The hearing Tuesday was barely minutes old when Committee Chairman Jeb Hensarling, a Texas Republican, reminded Yellen that he has launched a year-long Federal Reserve Centennial Oversight Project, with the ultimate goal of presenting legislation to overhaul the central bank.
The Financial Services Committee held five oversight hearings on the Fed in 2013, and Hensarling has indicated that he plans to “intensify and amplify” its efforts in 2014. He said the plan is particularly appropriate, given that the Fed celebrated its 100th anniversary in December.
“Any agency or bureau of government that is 100 years old probably needs a good check-up, especially one as powerful as yours,” Hensarling said. “And I remind all, independence and accountability are not mutually exclusive concepts.”
With the two houses of Congress split between Republican and Democratic control, a Congressional committee drafting reform legislation in one chamber might not seem like much of a threat. But most analysts believe Republicans stand a real chance of taking the Senate in the 2014 election, which would put Idaho Republican Mike Crapo – who voted against confirming Yellen and is on the record opposing the Fed’s monetary stimulus program – in line to chair the Senate Banking Committee.
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That means that in addition to trying to shore up an economy that, according to the two most recent reports from the Bureau of Labor Statistics, still isn’t producing jobs at the robust clip hoped for, Yellen and her staff will have to pay more than passing attention to the goings-on in the House Financial Services Committee. Yellen, her fellow board members, and Fed staff will likely be spending a lot of time with committee staff in the coming year as Hensarling’s investigation of possible reforms goes forward.
Given the variety of extraordinary steps the Fed has taken to support the economy in recent years, Hensarling will likely find a target-rich environment if he goes in search of examples of the Fed pushing the limits of its authority. With interest rates at near zero, the Federal Reserve has added trillions of dollars in securities to its balance sheet to keep interest rates low. It has also extended credit to institutions other than traditional banks, and changed the way it signals its intentions to the market.
Hensarling voiced the doubts of many of the Republicans on the committee about the effectiveness of the Fed’s monetary policy, claiming that it has had little positive effect.
“Perhaps the most critical issue we must examine is the limit of monetary policy to actually promote a healthy economy,” he said. “We have now witnessed both the greatest fiscal and monetary stimulus programs in our nation’s history, and the results could not be more disappointing.”
Yellen is likely to be hearing a lot more of that in the coming months.
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