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Dodd implies Fed must act at hearing for governor nominees

By Neil Irwin
Is a key senator trying to encourage the Fed to pursue a looser monetary policy? In his opening statement at a confirmation hearing for three nominees to be Federal Reserve Board governors, Sen. Christopher Dodd (D-Conn.) came pretty darn close to calling for the central bank to take new steps to support growth.

"While the economy is growing, it is not growing fast enough to help the millions of Americans who lost their jobs as the result of the crisis," said Dodd, chairman of the Senate Banking Committee. He noted that the unemployment rate remains very high, business investment is subdued and that some price measures "suggest that we are moving toward price deflation."

"It is evident that the economy is going to need all the help the Fed can provide over the coming year," he said.

That's not the same as calling for specific measures, such as new purchases of Treasury bonds or other long-term assets, to stimulate the economy. Dodd, like most senators, respects the independence of the Fed's monetary policy enough not to put explicit pressure on the board to take a given policy action. But the implicit suggestion of his statement is pretty clear: This economy is drowning, and you guys ought to do something about it.

Janet Yellen, the San Francisco Fed president and nominee for vice chairman of the central bank, added her two cents to the debate over more fiscal stimulus in her confirmation hearing moments ago.

Her message: If Congress wants to do more on the fiscal front to boost the economy in the short run, it should be paired with longer-term deficit reduction.

Responding to a question, Yellen said: "As Congress considers the option for further fiscal stimulus now, which is natural given the outlook, I would emphasize that it's very important and Congress will have more flexibility to move in the short run to support the economy if, simultaneously, it can put in place and show credibility on taking the measures necessary to attack the long-term deficit, which is widely understood to be an unsustainable situation that requires painful policy action."

For the record, Fed Chairman Ben Bernanke expressed essentially the same ideal at a hearing last month.

As the confirmation hearings began at Dirksen 538, Yellen was joined by nominees Peter Diamond and Sarah Bloom Raskin.

Nothing too shocking in the (fairly short) prepared statements from each nominee. Each promises fealty to the dual mandate that Congress has assigned the Fed, of maintaining price stability and maximum employment. Each also stresses the independence of the Fed from political influence and the Fed's transparency and accountability to the public.

From Yellin's prepared testimony:

"My approach going forward, as in the past, will be to bring a thoughtful and independent voice to [Fed policy deliberations], drawing on the insights of business and community leaders throughout the country, and thoroughly analyzing macroeconomic trends that affect the domestic outlook and the risks to our forecasts."

She concludes with,

"I strongly support Fed independence in monetary policy, and I am committed to enhancing the transparency that is essential to accountability and democratic legitimacy."

Peter Diamond, an MIT economist who does not have a traditional academic background in macroeconomics or monetary policy, says that as a member of academic economics departments,

"I have gained a wide knowledge of a variety of economics topics" and that "as a consequence, I have considerable awareness of the development of economic analyses of monetary policy and its impacts on both inflation and employment, as well as studies of the determinants of financial crises."

Diamond explains his fitness for the Fed this way:

"A central theme in my research career has been how the economy deals with risks, both risks at the individual level and risks that affect the entire economy. In all of my central research areas, I have thought about and written about the risks in the economy and how markets and government can combine to make the economy function better for individuals. If confirmed, this background should be very helpful at the Federal Reserve as part of the process of addressing our heightened awareness of the dangers of systemic risks."

He adds that his background in behavioral economics and law and economics should be helpful on consumer protection and financial literacy issues.

Raskin, the Maryland commissioner for financial regulation, explicitly stresses the need for the Fed to combat unemployment.

"We need to strengthen this recovery by expanding its foundations. This means that, in addition to maintaining stable inflationary expectations and keeping a vigilant eye on the emergence of new bubbles, the Fed must seek to fulfill the other part of its statutory mandate by addressing unemployment, which has pervasive social costs."

By Neil Irwin  |  July 15, 2010; 10:36 AM ET
Categories:  Federal Reserve  
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That S.O.B. could hve called Obama fraud on the altered legislation loophole scandal and pulled his ticket.

Now he wants to suggest something as Obama gives my tax money to India to build a Super Highway there, and to Korea to pollute the State with a battery factory????

OH PUUUUULLLLLEEEEEZE the ego of these azsholes is prosecutable.

Posted by: dottydo | July 15, 2010 9:26 PM | Report abuse

The twin goals of full employment and a stable economy (low inflation) are often mutually exclusive, so only Congress could contrive a system requiring both and dump its mandate on the Fed. Easy money will mean inflation and maybe better employment numbers or maybe just stagflation. Continuing budget deficits (thank you Congress) due to growing entitlements and new Federal programs will mean no one will be willing to continue lending us the money that has kept us afloat so far. We should be able to raffle off Alaska for a $1T or so, and most of the Western States contain huge Federal land reserves that can be sold to rich oil shieks. Everyone will have to spend 30 years as an indentured servant, but then will improve, especially for those who immigrate.

Posted by: Anonymous | July 15, 2010 10:35 PM | Report abuse

now if greenspan and bernanke didn't make cash so readily available and put the money supply on steroids...

by using repurchase agreements... essentially giving money at near zero interest in exchange for those junk rated "assets" they were peddling (collateral)...

the economy would never have imploded... banks would be offering 5% interest on savings accounts and CD's... and the value of the dollar would be 105% of the euro...

but heck... how else was bush & cheney going to pay for their wars...???

how else was bush & cheney going to fund their tax cuts for the wealthiest 1% ...

i saw it coming... the very second bernanke said he was going to stop the fed/BEA from tracking the money supply metric M3...

yep that's right... during his senate confirmation hearings... right on C-span... you had to be a real moron not to see this train wreck coming... 3 years in advance...

i did.

Posted by: FranknErnest | July 15, 2010 11:18 PM | Report abuse

So, Mr. Dodd; The Fed giving $ to banks at 0% interest so they can reap HUGE profits loan to others WITH interest isn't enough for ya?


Posted by: illogicbuster | July 16, 2010 12:49 PM | Report abuse

Well Dodd will not be around the Senate for much longer. Unfortunately, the fiction that loose money can create economic growth will not depart with him. Nor will the idiotic idea that the only bad consequence of loose money is a wage and price inflation cycle. One would think that even those at the mental level of our Congressional representatives would have the minimal intelligence needed to understand the lessons of our recent economic history.

Posted by: dnjake | July 19, 2010 1:20 PM | Report abuse

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