Increased Fed Transparency Expected Under Yellen

Experts weigh in on new head of the Federal Reserve
By Heide B. Malhotra, Epoch Times
January 8, 2014 Updated: January 7, 2014

The Senate vote was out on Jan. 6, confirming former Federal Reserve Vice Chair Janet L. Yellen as the next chairwoman of the privately owned Federal Reserve Bank (Fed).

Yellen, the first woman to take the position, is replacing Ben S. Bernanke, who decided to step down when his term ends on Jan. 31. Yellen will preside over her first Fed meetings as chairwoman on March 18 and 19.

Despite Sen. Rand Paul’s (R-Ky.) threat to block her nomination, the vote tilted in her favor. In an Oct. 28 press release the senator asked for the nomination to be held up until the Fed had been audited. Last February, Paul introduced “The Federal Reserve Transparency Act of 2013,” an act that has a 14 percent chance of being enacted, according to Govtrack.

In mid-November 2013, then-Vice Chair Yellen testified during her confirmation hearing before the U.S. Senate Committee on Banking, Housing and Urban Affairs, that she was “committed to using the Fed’s supervisory and regulatory role to reduce the threat of another financial crisis.”

In answering senators’ questions during her confirmation, Yellen was very astute. She repeated already-known information and did not hint as to where she would take the Fed, if confirmed.

For example, when asked about decreasing interest rates on the reserves (IOER) the Fed holds for banks, she gave a lecture on IOER economics. She stated that such a move could be problematic, without giving away any of her thoughts on the subject.

She addressed at the end of her testimony the “too-big-to-fail” issue, saying, “I believe that capital and liquidity rules and strong supervision are important tools for addressing the problem of financial institutions that are regarded as ‘too big to fail.’”

Yellen most likely will continue building and broadening the policies established under the Bernanke reign, according to economist and market experts. However, in an effort to forestall any market misunderstanding, she will be more careful concerning communication to the public in order to prevent market instability.

“I am confident that Janet will stand up for American workers, protect consumers, foster the stability of our financial system and help keep our economy growing for years to come,” Obama said in a written statement, according to The Associated Press.

Many Republicans were less enthusiastic. Sen. Charles Grassley (R-Iowa) warned that a continuation of the Fed’s easy money policies “risks fueling an economic bubble and even hyper-inflation,” which he said could cause “real and lasting damage to our economy.”

Bond Purchases

The Fed announced in December that the labor market has improved enough that it will begin reducing its $85 billion in monthly bond purchases, starting with a $10 billion reduction this month. It has pushed that money into the economy to try keeping long-term interest rates low.

But Yellen will face questions about how to manage that process. Moving too fast could spook financial markets and shove interest rates higher, while withdrawing the bonds too slowly could risk creating bubbles—that might burst—in real estate, the stock market or other assets.

The bond purchases have ballooned the Fed’s holdings over $4 trillion. That leaves Yellen with decisions about how to wind down the central bank’s balance sheet to a smaller, more normal level without destabilizing financial markets used to the huge cash infusions.

Yellen also will have to decide when and how to ease off short-term interest rates, which the Fed has kept near zero since December 2008. To assure investors that those rates won’t precipitously rise, the Fed has repeatedly issued statements saying that policy will continue.

Personality and Leadership Traits

Yellen is known for being unpretentious, according to an October 2013 article on the Fed Playbook. This trait will allow her to understand the needs and requirements of the public in general, her staff, and others that come into contact with her.

Her leadership skills, such as consensus building and cooperation—including handling disagreements skillfully—are well-known and an asset to her new role.

“She understands how risky financial practices deep inside the largest Wall Street banks can have a terrible and terrifying impact on American families,” said Sen. Sherrod Brown (D-Ohio).

Furthermore, Yellen, as head of the Fed’s communication subcommittee, understands that the Fed has a communication problem, keeping the public in the dark. She said during a November 2012 speech at the Haas School of Business that the Fed “is bolstering its efforts at communication.”

She also hopes that down the road, the Fed will prove to be more transparent during these volatile times.

According to the Fed Playbook, today the Fed faces a difficult communication environment where complexities have increased manifold. It will be challenging for Yellen to provide transparency concerning monetary policy instead of publicizing diverting views, for example, displaying a united front.

Not Government Owned

“Some people think the Federal Reserve banks are United States government institutions. They are not government institutions. They are private credit monopolies,” testified former Congressman Louis T. McFadden on June 10, 1932, before the House of Representatives, as published on Alachua Freenet.

According to the Global Research website, the Fed is privately owned with its shareholders being private banks. Not a single stock is owned by the U.S. government.

However, Congress has oversight, which means that the Fed reports periodically about its activities to Congress after they’ve occurred. In short, Congress has the authority to change the Fed’s modus operandi by changing an existing or enacting a new law.

In an answer to the question, “Is the Federal Reserve a privately owned corporation?” the Federal Reserve Bank of San Francisco states on its website: “Yes and no. The Federal Reserve (the Fed) enjoys a unique public/private structure that operates within the government, but is still relatively independent of government to isolate the Fed from day-to-day political pressures.”

The political reality is that neither the president of the United States, nor any other executive or legislative government body, may interfere in Fed policies.

Rumors are circulating and reported by the media as to where the Fed is heading with Yellen at its helm. The majority of opinions do not see many changes from existing policies, with the exception that transparency would increase under Yellen.

However, an October Merk Investments article, published on Advisor Perspectives, suggests that her direction will create “more speculative investments.”