Yellen rejoins QE debate as hearing gives critics forum

Tapering Timetable

While the hearing may pose few roadblocks to her confirmation, it will give Yellen the opportunity to explain the philosophies that will guide her conduct as she decides when to wind down an $85 billion-a-month bond purchase program and when to raise the Fed’s target interest rate, which has been held near zero since December 2008.

As vice chairman, Yellen led a subcommittee focused on the Fed’s communications strategy, and during her tenure has given detailed speeches on how the central bank’s policies work.

Once under consideration for the top job, she stopped giving speeches. Her last public address, on regulation, was delivered June 2. She has not given a speech on monetary policy since April 16.

Though she has not detailed her precise views on the Fed’s current strategy, she has voted in favor of every decision of the Federal Open Market Committee under Bernanke. In a meeting with Louisana’s Vitter she continued her support of those policies, according to Vitter.

Labor Market

The FOMC began $40 billion in monthly purchases of mortgage-backed securities in September 2012 and announced it would add $45 billion in Treasury securities to that pace in December. Fed officials have said their current pace of purchases will continue until the labor market improves “substantially.”

Yellen “didn’t back off on that at all,” Vitter said in a Nov. 6 interview with Bloomberg Television’s Peter Cook. “So we just disagree there.”

The hearing will provide investors a chance to hear her views and assess whether stocks will continue the upward trajectory of the Bernanke years.

Equities in the U.S. are near record highs. The Standard & Poor’s 500 Index has rallied 24% this year, putting it on pace for the best annual gain in a decade. The gauge has rebounded 161% from a 12-year low in March 2009, adding more than $10 trillion in market value. The index fell 0.4% today to 1,761.36 at 9:41 a.m. in New York.

Rising Rates

Speculation that the Fed would begin to taper its bond buying helped push 30-year mortgage rates to a two-year high of 4.58% in August, while the yield on the 10-year Treasury rose to a two-year high of 3% in September. The average mortgage rate was 4.16% as of Nov. 7, while the 10-year note yield was 2.73%.

At their September meeting, Fed policy makers voted unexpectedly to keep the QE program unchanged, a decision they repeated at an Oct. 29-30 gathering. Economists surveyed by Bloomberg News last week predict the first tapering of the program won’t occur until March.

Yellen may opt to be circumspect in outlining her views, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, and a former Richmond Fed researcher.

“Everyone is expecting her to lay out this super-detailed manifesto of her beliefs on how the Fed should run policy and what she intends to do but the reality is she’s just trying to get confirmed,” Stanley said. “She’ll just want to get in and out without saying anything that gets her in trouble. She has every reason to be as Plain Jane uncontroversial as she can.”

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