Fed: Yellen's Testimony

Published on November 8, 2013

Federal Reserve Chair-designate Janet Yellen’s  courtesy calls on Capitol Hill have so far gone as well and as smoothly as could be expected in the run up to her confirmation hearing next Thursday before the Senate Banking Committee. Several Republicans, including Nebraska’s Mike Johanns, have already indicated they are highly likely to vote for Yellen.

*** The good will of the private meetings, however, looks very likely to give way to a contentious public sparring in Thursday’s hearing, in which we understand Republican members will sharply question the Fed’s ultra-easy monetary policy as a way to sharpen its attacks on the Obama Administration and its fiscal policies. Depending on how Yellen handles her first-ever tough questioning on the Hill, there may be market rattling headlines, especially over the fate of QE. ***

*** We nevertheless expect Yellen to probably win 14 Committee yes votes, including two, perhaps more, Republican votes. She is certain to be confirmed in the eventual Senate floor vote, which will only require a 51 vote simple majority. But she is nevertheless likely to garner no more than perhaps a dozen Republican votes, with a 65 to 67 vote total that would be the lowest ever level of political support for an incoming Fed Chair. ***

*** And beyond Yellen’s confirmation, we understand the White House has finalized its list of three nominees to fill the rest of the Fed Board of Governor vacancies, and will present them as a “package” with the reappointment of Fed Governor Jerome Powell. But their confirmations are likely to face an even fiercer Republican opposition that could drag out deep into next year, an election year. Find some balance with the next Fed appointments or we will block them is likely to be the Republican line of attack. ***

Trial by Fire

When Yellen testifies before the Senate Banking Committee Thursday, it will end a long self-imposed silence during the long turbulent political battle over her nomination.

Her last public remarks on monetary policy were seven months ago in April when she gave two speeches asserting the effectiveness of QE, and making a strong case for the lower for longer forward policy guidance and an optimal policy path of a gradual increase in rates once the tightening is underway.

We understand that Yellen has more or less made the same points on monetary policy in her exchanges with Senators to date, with most of the questions directed back to her focused on when and how QE will be brought to an end, as well as pointed questions on managing the balance sheet during the Exit.

Both Republicans and Democrats alike have also pressed her hard on regulatory issues, which in fact may dominate the questions during the hearings on Thursday.

But Yellen will almost certainly be put through a much more heated trial by fire in explaining and defending her views and Fed policies when she testifies and fields questions from the Banking Committee members, starting at 10 Thursday morning and continuing into midafternoon.

“Has the Fed gone too far?” “Is there any value of the dollar?” “Is the Fed just making it too easy to increase the total government debt at record levels?” are likely to be the type of questions on monetary policy. And in general, the thrust is likely to be that this can’t be a “traditional” Fed nomination since the Fed has intruded on the elected branches of government in its “questionable” easy money or assistance to Wall Street and the big banks.

She can be expected to reassure the Committee the Fed has the necessary tools to manage the enlarged $4 trillion plus balance sheet when the time comes. It will also give her the opportunity to assert her commitment to low inflation over the medium term and to abiding by the 2% inflation target as she makes her case for allowing a temporary rise in inflation in order to bring unemployment down to trend levels.

She is likely to acknowledge the potential costs of QE in terms of managing the balance sheet during the Exit as well financial market functioning, but she will argue those costs have not yet outweighed the benefits. On the taper, Yellen’s careful phrasing so far in her courtesy calls has been that while highly successful in supporting a recovery, QE will “not go on indefinitely.”

That vagueness, however, may be hard to maintain in the heat of repeated questioning during the hearing. Likewise, explaining the decision not to start tapering QE in September is going to draw attention, even more so in light of this morning’s stronger than expected NFP number.

The Republican committee members have been briefed on Yellen’s likely case about deflation risk, weak aggregate demand, and the question of fiscal drag on growth, the latter of which most Republicans simply refuse to accept. The other themes are likely to be simply brushed aside by pressing the belief that Yellen and her fellow FOMC members made choices that “intruded” excessively into so many aspects of the economy that it is undermining growth; and more to the point, by pursuing such an overly aggressive easy monetary policy, it took the pressure off Congress to rein in the reckless spending policies of the Obama Administration.

The target of the Republican attacks and pointed questions, in other words, is not going to be Yellen herself, whose credentials for the job are not questioned, or even to some extent the Fed, but how the Fed’s far too easy monetary policies enabled the Obama Administration to pursue its reckless, debt-building fiscal policies.

Yellen’s testimony provides a too useful and conveniently timed political vehicle to pass up in order to go back on the attack after the political disaster of the shutdown, Republicans believe,and which will provide them with the opportunity to further deepen the political turn for the worse for Obama in the wake of the Obamacare roll-out problems. It will be a relatively easy “nay” vote for the GOP that doesn’t support Obama’s policies, and which needs to ward off the activists among the Tea Partiers.

Confirmation Timeline

The Banking Committee will not vote on the same day as the hearing, as many members will have follow up questions to which Yellen and the Fed staff will have to respond by letter. South Dakota Democrat Tim Johnson, the ranking majority chair of the committee, has already said he intends to move the Yellen vote through his committee quickly, and by that he meant before the Thanksgiving recess at the end of November.

Despite the likely aggressive questioning by Republican members of the Committee, we still expect Yellen is likely to pick up at least two Republican votes, Johanns of Nebraska, and perhaps Mark Kirk, from blue state Illinois. That would give Yellen a 14-8 majority vote, easily enough to send her confirmation to Senate Majority Leader Harry Reid to steer her confirmation through holds and filibuster threats to a floor vote.

First up will be the hold threats by Kentucky’s Rand Paul, who is demanding a floor vote on his S209 Audit the Fed bill, and another threatened by South Carolina’s Lindsey Graham, who is still demanding the Obama Administration agree to more hearings and eyewitnesses to the Benghazi consulate attack last year.

It will take 60 votes to overcome the holds, which is likely, but it will take several days of maneuvering. While Paul lacks deep support from the Republican side, Lindsey, joined by Arizona’s John McCain, may have more support and be able to negotiate a compromise deal to lift the hold, perhaps in working around the sequester to wrestle a commitment for higher defense spending in the Budget Conference Committee negotiations.

Likewise, while a filibuster of the Yellen confirmation is unlikely, one could be threatened if a show of GOP unity can be maintained into early December. It will take another three days up to a week for Reid to overcome the filibuster threats and to limit debate to 30 hours after he files cloture.

By the second week of December, we expect Reid to put the Yellen confirmation to a floor vote in the Senate, which will only require 51 votes to pass.

Even with the anticipated withering GOP criticisms and political attacks on the Obama Administration, we still think Yellen will win up to 65 to 67 votes in the Senate floor vote, with probably no more than a dozen Republican votes on top of the 55 Democratic votes (Vermont’s Bernie Sanders, who caucuses with the Democrats, may vote no on anything or anyone to do with the Fed).

Yellen, in other words, will be confirmed, and before she sits down with her colleagues for a crucial Federal Open Market Committee meeting December 17-18, albeit with the lowest level of Senate support of any Fed nominee, including Bernanke, who garnered only 70 votes in 2010.

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