Grilled on Capitol Hill, Yellen Defends Fed Policy

Testifying on Tuesday for the first time as the head of the Federal Reserve, Janet Yellen promised lawmakers continuity with her predecessor, shrugged off the threat of rising financial volatility in developing nations and stressed that she’ll look beyond the labor market to decide when to begin raising interest rates.

Yellen went before the House Financial Services Committee to deliver the Fed’s semiannual monetary policy report. From her opening remarks onward, she emphasized that she’d continue the policies of Ben Bernanke — which she helped shape.

She said she didn’t expect a global crisis to arise out of turmoil in Turkey, Argentina, Brazil and elsewhere, turmoil blamed in part on the Fed’s ongoing taper of controversial bond purchases, which have been disruptive to foreign markets.

“Our sense is at this stage, these developments do not pose a substantial risk to the U.S. economic outlook,” she said. “We will, of course, continue to monitor the situation.”

On the Fed’s bond-buying program, eased in January and February, Yellen expected to continue lowering the amounts of such asset purchases throughout the year. She emphasized that the Fed’s benchmark federal funds rate, which influences borrowing costs across the economy, is likely to remain near zero well after the bond purchases have ended.

Yellen also clarified that an earlier suggested signpost for raising rates — the unemployment rate falling below 6.6 percent — is no longer the threshold for action, “especially if projected inflation continues to run below the 2 percent goal.”

Translation: Deflation, or the decline in prices across the economy, remains a lurking threat and the Fed actually wants more inflation.

Financial markets liked what they heard Tuesday, continuing to rise as Yellen’s testimony went on and on.

The hearing itself was unusual in that traditionally, though not always, the Fed chief alone testified. Chairman Jeb Hensarling, R-Texas, called a panel to effectively rebut Yellen’s testimony. It included experts from liberal, libertarian and conservative groups, as well as John Taylor, a longtime Treasury official, scholar and fierce critic of the Fed’s bond purchases.

Yellen pushed back against repeated support for legislation to allow the Government Accountability Office to audit the Federal Open Market Committee, which makes decisions about interest rates.

The Fed publishes its balance sheet weekly, she said, and it has outside auditors for virtually everything it does. Allowing auditors to come in during or shortly after deliberations to assess the correctness of a policy decision amounts to political influence over the process, she said.

“It is really critical that our monetary-policy decision-making … remain free of GAO audits,” Yellen said, in response to questions from Rep. Michele Bachmann, R-Minn.

Members of Congress feel less and less empowered to hold the Fed accountable, Bachmann countered.

“The people know that, eventually, they will be the ones called upon to meet the bills and payments accumulated by the Federal Reserve,” she said.

The Fed’s bond buying to stimulate the economy has generated profits for the Fed that are turned over to the U.S. Treasury.

Rep. Randy Neugebauer, R-Texas, argued the opposite of Bachmann, suggesting that the outsized role of the Fed in the purchases of short-term government bonds and the profits generated keeps borrowing costs artificially low and exacerbates deficit spending.

“The Fed has almost become a deficit-enabler, in that you are making it easier to mask what the real costs of these deficits are,” he told the Fed chief. Yellen acknowledged that deficits are a “negative” to the economy over the longer horizon. But she defended the bond purchases as necessary and effective.

“I believe our policy has been successful in increasing growth,” she said.

Yellen is the first Fed chair appointed by a Democratic president since 1979. Alan Greenspan and Bernanke were Republicans appointed by a Republican president and reappointed by a Democratic one.

Accordingly, Democrats were far kinder to Yellen on Tuesday, but they didn’t get her to agree that rising income inequality — a key campaign theme — is partially to blame for the sluggish recovery.

“I think we don’t have certainty about that,” she said, acknowledging only that the widening gap between rich and poor points to a “disturbing” trend.