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."
July 15, 2010; 10:36 AM ET
Categories: Federal Reserve
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