• What to watch for as Yellen faces Senate questions
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     | November 14,2013
     
    AP Photo

    Janet Yellen, vice chair of the Board of Governors of the Federal Reserve System, places her name plate at her seat at the International Monetary Conference in Shanghai, China, in June.

    WASHINGTON — Janet Yellen is sure to face skepticism at a hearing Thursday on her nomination to lead the Federal Reserve from Republicans who say the Fed’s policies may be swelling asset bubbles or raising the risk of high inflation.

    The one thing investors will most want to know is the one thing Yellen isn’t likely to say: When she expects the Fed to scale back its stimulus for the economy.

    As chairman, Yellen would likely extend the low-interest-rate policies pushed by the departing Ben Bernanke. As vice chairman, she’s been a key architect of those policies.

    She’s expected to stress Thursday that the Fed under her leadership would honor its dual mandate: To maximize job growth and keep prices stable. Yet at a time of still-high unemployment (7.3 percent) and low inflation (sub-2 percent), a Yellen-led Fed would likely favor Bernanke’s approach of keeping rates low until the job market and economy improve consistently.

    Even with some Republican resistance, Yellen’s backing by the Senate Banking Committee and confirmation by the full Senate is viewed as all but assured. But approval won’t come before critics air their grievances about the Fed’s response to the financial crisis and the Great Recession.

    Thursday’s hearing should feature questions delving into the following topics. Investors will be alert for any hints of when a Yellen-led Fed might start reducing its $85 billion in monthly bond purchases — a slowdown often called “tapering.”

    The Fed has been buying Treasury and mortgage bonds to try to keep long-term borrowing rates low to fuel spending and growth. In June, Bernanke suggested that the Fed could start tapering its purchases by year’s end if the economy improved as expected.

    Stocks plunged on the news. And rates on long-term bonds and mortgages soared on investors’ fear that the Fed’s support for the economy would slow sooner than expected.

    Since then, the economy and the job market have failed to show consistent strength. At its meetings this fall, the Fed decided the economy wasn’t healthy enough for it to ease its stimulus even slightly.

    Watch for any hints that Yellen might extend or expand the Fed’s move toward more openness to the public.

    A 1980s book on Paul Volcker’s chairmanship, “Secrets of the Temple,” described a secretive institution that revealed next to nothing. That began to change under Alan Greenspan, and the move toward transparency accelerated under Bernanke: The Fed included more details in its post-meeting statements, provided more frequent economic forecasts and scheduled regular news conferences by the chairman.

    Yellen has been a leading proponent of openness.

    Though she’ll take care to sound evenhanded, look for hints that Yellen thinks maximizing job growth is a more urgent priority now than the Fed’s other duty to keep prices in check.

    The dual mandate can be tricky: It can tug the Fed in opposing directions. To maximize employment, the Fed would normally lower rates. Conversely, to avert high inflation, it would seek to raise rates to slow growth.

    Two Republicans on the Banking Committee, Sens. Bob Corker of Tennessee and David Vitter of Louisiana, support legislation to limit the Fed to just one mandate — guarding against high inflation.

    Yellen and other Fed officials who back Bernanke’s approach have argued that a still-subpar economy means the Fed must focus on boosting growth. They note that inflation remains well below the Fed’s 2 percent target even while unemployment remains high.

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