Yellen warns against withdrawing Fed stimulus

(MoneyWatch) Federal Reserve chief nominee Janet Yellen said Thursday that the economic recovery still requires support from the central bank. She refused to be pinned down on when the Fed under her watch might begin to ease back on stimulus. 

"It's important not to remove support, especially when the recovery is fragile and the tools available to monetary policy should the economy falter are limited given that interest rates are at zero," Yellen told the Senate Banking Committee Thursday during a hearing to consider her nomination to succeed current Fed Chairman Ben Bernanke, who is expected to leave in January. 

Yellen deflected questions about when the Fed would start reducing the bond purchases, a policy known as "quantitative easing." Critics say the policy raises the risks of inflation, and Sen. Michael Crapo, R.-Idaho, pressed Yellen on when she, as Fed chief, would move to start withdrawing support.

While acknowledging the validity of such concerns, saying that "the longer this program continues, the more we will have to worry about those risks, Yellen said that there is "no set time" for reducing the pace of bond purchases.

Yellen, 67, is currently Vice Chair of the Fed. She started at the bank as an economist in 1977. Following stints in academia at the University of California, Berkeley, and London School of Economics, she joined the bank's Board of Governors in 1994. From 1997 to 1999, Yellen served as President William Clinton's chief economic adviser, returning to the bank from 2004 to 2010 as president of the Federal Reserve Bank of San Francisco.

Although she is expected to be confirmed, some lawmakers have threatened to delay the process. Sen. Rand Paul, R-Ky., has said he will seek to place a hold on Yellen's confirmation unless lawmakers consider a bill that would allow Congress to audit the Fed. 

In June, for instance, interest rates surged after Bernanke signaled that the Fed was set to start withdrawing monetary stimulus. Although he later tried to walk back that perception, conflicting messages by other Fed members clouded the issue of when the Fed would start scaling back its bond purchases. The confusion caused U.S. Treasury yields to spike and triggered a sell-off in the stock market, which has been propelled to record highs by the Fed's easy-money policies. 

A major question is whether Yellen will work harder to unify Fed policy, said University of Oregon economist Tim Duy. "Does she make an effort to try to streamline communications among the various policymakers, particularly the regional presidents, in order to try to ensure a more consistent policy voice rather than the open debate that has gone on under Bernanke?"

Along with Bernanke, Yellen is a strong advocate of what is known in financial circles as "forward guidance." In essence, that approach amounts to the Fed clearly telegraphing its monetary policy intentions to manage investor expectations and to avoid the kind of surprises that can cause market volatility.

The Fed, along with other central bankers around the world, has increasingly turned to forward guidance to support the recovery because interest rates have already been lowered to near zero. Ideally, under this view, the Fed's promises to create the conditions for economic growth boost confidence and encourage lending and investment.

For this approach to work, however, the Fed's pronouncements must be seen as credible, which puts a premium on unified and consistent monetary policy. 

"What we need is stability, calm and confidence," said Ernie Patrikis, a partner with law firm White & Case and formerly the chief operating officer of the Federal Reserve Bank of New York. "That's what she has to exude, and others have to back her."