Yellen’s Confirmation as Fed Chair Will Leave Easy-Money Policies, Risks Intact

[Janet Yellen]

The Senate’s overwhelming vote to approve Janet Yellen on Monday to become the next chair of the Federal Reserve puts the U.S. central bank on a path to maintain its easy-money policies but leaves unanswered questions about the long-term risks of such unprecedented intervention.

Conservatives warn about the central bank taking on trillions of dollars in new liabilities through its aggressive bond buying, while progressives champion her ascension to the Fed’s top post after current Chairman Ben Bernanke’s second four-year term ends on Jan. 31. What seems clear is that investors have become accustomed to the Fed’s activism and responded positively, as the Standard & Poor’s 500 Index rose 29.6% in 2013 for its biggest yearly gain since 1997.

With the Fed’s plan to taper its monthly bond purchasing from $85 billion to $75 billion this month, it is unpredictable how the markets will react as the central bank further scales back its monetary stimulus. Another worry is that the Fed’s policies also are bloating the central bank’s balance sheet with huge liabilities.

“Since 2008, the Federal Reserve has held interest rates near zero and quadrupled its balance sheet to $3.9 trillion,” said House Financial Services Committee Chairman Jeb Hensarling, R-Texas. “It has, in many ways, served as an enabler to the Obama administration’s failed economic policy through an unprecedented campaign of monetary stimulus with three massive rounds of bond buying — a campaign described by one former Fed official as ‘the greatest backdoor Wall Street bailout of all time.’”

Rep. Hensarling, who added that U.S. economy continues to be stuck in the “slowest, weakest so-called recovery of modern times,” is not alone in raising concerns about the Fed’s activities. Last month, the House Financial Services Committee that he chairs announced its “Federal Reserve Centennial Oversight Project” which will include an aggressive series of hearings during 2014 that will culminate with the development of legislation to change how the nation’s central bank operates.

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With Democratic control of the Senate and the White House, passage of any Fed-related bills in the Republican-led House may prove to be no more than posturing rather than actual change. But hearings and legislation can draw attention to the Fed’s actions.

Meanwhile, the confirmation of Yellen on Monday met with predictable praise from progressives.

Sen. Elizabeth Warren, D-Mass., regarded by some observers as a potential 2016 Democratic presidential candidate, did not vote on the confirmation due to a delayed flight but her office released a statement from the senator praising the confirmation of Yellen to become the Fed’s first woman chair.

Yellen understands that the Fed has a “critical role” to play in aiding the U.S. economic recovery and she recognizes that the central bank’s role of regulating the biggest banks is just as important as its duty to set interest rates and manage inflation, Sen. Warren said in her statement.

Easy-money Fed policies could become a recipe for future inflation, but the weak U.S. economy and an unemployment rate above 7 percent are higher priorities for Fed officials right now. With the central bank’s dual mandate of price stability and maximum employment, the Fed is unlikely to modify its existing policies anytime soon, with Yellen expected to continue along the same path as Chairman Bernanke.

The Fed’s willingness to borrow now with the promise to pay back in the future when interest rates could rise substantially adds further risk for U.S. taxpayers who already are on the hook for the federal government’s massive debt that is $17.3 trillion and growing.

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