US Federal Reserve Chair Janet Yellen appeared before the US Senate Banking Committee on February 27, 2014 to deliver the semiannual Monetary Policy report to the Congress, also known as the Humprey Hawkins testimony. Typically scheduled in February and July, it involves a prepared statement followed by questions and answers.

In the days just after the February 27th event, I share the following post on Facebook in four separate segments. Each post represented a section from a forty minute lecture/twenty minute discussion I led on the hearing during the first week of March.

It is shared here by request and for reference/comparison to Chair Yellen’s upcoming July 2014 appearance on The Hill.

Also of note: The next Fed Press Conference, expected to be a news-filled event due to a number of pending global decisions affecting the greater global finacial system, will be held on June 18th.

Part one of the post begins just below. Please direct inquiries to me on Twitter @WaterandWool, or please send me a message via Facebook. Thank you in advance for your inquiries, whether academic or media-directed.

One

A #Fed Chair’s visit to Senate #banking is not a linear, well organized event. It’s a unique melange of things. This is the nature of the creature, and every time one of these extravaganzas ends, I have this moment of looking around at my colleagues, either in person or via phone or both, and asking “what was the theme of all that?” There’s such an urge to weave it all together in a pretty way, but the truth is to do that you have to pick and choose what and whom you wish to highlight or ignore. As an overview: Chairman Yellen (Chair or Chairman, either is fine, as she assured Senator Corker (R-TN) when he kindly asked how she wished to be addressed) made no errors yesterday. She’s now had three error free hearings (confirmation, and two H-H,) which is good but ups the pressure on her for each subsequent appearance. What she has done, and I’ll identify a few specific moments in subsequent posts, is avoid questions that are inadvisable to answer in a live hearing, and answer everything else quite well. In the context of today’s Fed, this is skillful. “But she needs to answer those difficult, avoided questions,” you say. And you are correct. She answers them off camera. I know that doesn’t sound ideal. But it’s necessary, because the global financial system remains stable for another moment, hour or day when and as she chooses the right boundary lines. If you looked through the recently released Fed minutes from the 2007-2008 pre-panic/panic timeframe, you saw how communications — what gets said in the room vs. outside the room — has ascended to a point that places it alongside economic thought in the Fed’s expanding toolkit. Communications no longer describes what the brains in the room are thinking — it participates and shapes thought. The medium becomes the message and the message is the medium. (It’s happened; we are there.) In December I characterized former Chairman Bernanke’s press conference as “signal not substance.” Perhaps a better way to say that is that signal and substance are part of the very same thing. Both are policy action; neither waits upon the other as used to be the case. On the topic of themes. I’ve already noted that the questions were all over the place. Some were relevant and sharp, others brilliant but too widely put for the timeframe and live broadcast setting, and others were a disappointing waste of the Chairman’s time. If I were to choose one thematic overlay, it would be this. Do you see the Fed’s role as systemic first, or systemic second? For those working near to the Fed (or for that matter the US Treasury,) this is somewhat of a fictional question. The system is the highest priority, the originator of all other choices. Without systemic stability, all of these other discussions are moot. System is never second. This is neither good nor bad; it just is. Yesterday, it was possible to draw a line between which Senators conveyed their understanding of this concept and which Senators did not. While there can certainly be disagreement on Fed policy, monetary and other, and how it interacts with fiscal policy that is (or is not) endeavored by Congress, suggestions made absent acknowledgement of the reality/necessity of the “system first” framework are going to be taken less seriously — by Congress, Treasury, the Fed, the market — even if they are beautifully intentioned and morally sweet. They don’t indicate political courage as much as a lack of knowledge, either real or feigned. As I choose which questions to highlight, I’ll note who is speaking to the goal of system stability (an area that is beyond ideology or partisanship, for all intents) and who is driving a political message that while “mediaworthy” was ultimately irrelevant to the Chairman’s visit to the Hill. The Chairman is not a politician nor does she see herself as one. In a stability-focused policy framework, a post-rules environment, even hawk and dove labels are far less useful. As I said to those with me yesterday — say you’re in your house up in the hills just west of Stanford University, and a wandering mountain lion who hasn’t eaten lately ambles into your kitchen.
Do you engage an ideological debate? No. Really not the point.
If you live in the hills, with mountain lions as neighbors, you take precautions and you have a system. A plan. Maybe you never use it. Maybe you do.

Two

Changes happen. Crises happen. While the #Fed tries to anticipate them, we know that not everything has been, or will be, accurately foreseen. While there may be debate as to the best way to plan for crisis, all are very much in support of making sure the overnight does not suffer- that liquidity does not freeze up to the ultrashort moment, thereby freezing the entire system. The system came dangerously close to a moment just like this in 2008, and the responses in that instance framed operational exercises following. These exercises are tests, rehearsals, practice runs — conducted to accustom the system to specific actions should these actions become urgently necessary. Senator Kay Hagan, (D-NC) conveyed that she and her team had read the January 2014 Fed minutes, and had focused upon an important systemic role of the Fed in doing so. How is the Fed preparing to enable the system to operate in a situation of change, challenge or shock? Chairman Yellen contexts her reply in a framework of an eventual rise in short term rates, choosing her words carefully as she answers. She mentions, smiling as she does, that such system components kick in at times when the Fed may need to grasp greater “control” over the short term. This may be a mere transition smoothing, ensuring no market-shaking breaks or bumps, or,she infers…and she assures all that this is not about to happen, a situation in which it would hypothetically be necessary to pull in immediate, urgent support for the US Dollar. (Ahem…) She places this response calmly and within the scope of prudent advance planning (which it is.)

What happened at the recent FOMC meeting (January 2014) was an extension of the exercise and a willingness to expand the dollar volume involved. What Hagan’s question basically asked for is confirmation that the Fed is anticipating bumps and panics, large and small, bringing in the lessons of 2008 as they do.

As rate action could happen sooner — or later — this was a mutually beneficial question for both the Senator and the Chairman, even though it pretty much confirms that the Fed is worrying about another possible crisis. Absent stability at the level here discussed, micro level enforcement action, and with it attention to the greater economy, is not possible. (“System first.”)

Clip of the Chair’s exchange with Senator Hagan is here. http://www.c-span.org/video/?c4485622/rrp

Three

“What effect has this all had? QE, all of it? How do you quantify that effect?” I just paraphrased most of Senator Pat Toomey’s (R-PA) question set, one which framed one of the more informative segments of Chairman Yellen’s visit to Senate Banking. Toomey’s questions were both essential and too extensive for the setting in which they were asked. They might have been better suited to a hearing in which the Senator had at least a few hours to question the Chairman, rather than just a few minutes.

To the casual observer, this exchange may have looked like a Republican Senator asking the Chairman to defend herself.

Too easy. That’s not what it was.

The combination of QE (speaking here of QE2 and after, policy conducted within post-panic ZIRP) and Dodd Frank has altered the banking and credit — and with it economic- landscape in both expected and unforeseen ways. This grand “experiment” has changed everything. While Toomey does not mention this outright, it may have initiated demographic shifts in political alliances as well.

Which party is the party of the working woman/man? Of upward mobility from a lower economic class? Maybe that question was obvious many years ago.

It isn’t anymore.

When Senator Bob Corker (R-TN) chided Senator Chuck Schumer (D-NY) for issuing media messaging that had little to do with the hearing and was an inappropriate use of the Chairman’s time (his welcome to Chairman Yellen was of course appropriate and customary), this was also not a throwaway bit of partisan bickering.

Here’s why.

Quantitative Easing, per sources including this McKinsey report , has allegedly effected the greatest transfer of wealth from households to the banking sector in history.

The associated inflation of asset bubbles and manipulation of the transparency of price and market mechanisms has been an astonishing, unprecedented gift to those who own assets and have access to significant investable wealth.

In related, Zero Interest Rate Policy (ZIRP) has removed incentives and relationships linking present-future decisioning about spending and saving, with greatest negative impact upon those who have saved or proposed to save towards the future. This act of saving for the future, and the behaviors and conduct associated with it, is traditionally associated with the middle class and its desire for upward mobility. Now (temporarily?) put on hold.

Alongside, Dodd Frank has applied extensive pressure to community banks. This is not a trick of any sort — Dodd Frank was written by and for the system and its continuation, for the SIFI level sitting far above the community banks. This decision was a tradeoff, one supported by a number of valid — even unquestionable — arguments even as it has proven less than ideal for many.

Senator Joe Manchin (D-WV) followed what was a rather incoherent question on Bitcoin with a far more solid one about community banks, mentioning a recent Mercatus report in doing so.

Community banks serve the wider market. They are local, and they are answerable in a way that very large institutions cannot be. As I say often on this page, they are almost a different industry altogether from the SIFIs. They view credit differently. They serve a different and more diverse demographic. As the origination of community banks has dwindled as regulations designed for larger players have grown to unwieldy levels, we see a new class of unbanked (small business, self-employed, recent arrivals etc.) emerging that did not exist before.

Those institutions not systemically essential, as designated up at FSOC level, (via a process that could use some additional transparency and specificity as mentioned by Senator Tim Johnson, D-SD and Senator John Tester, D-MT ) currently hover in a sort of indeterminate hold, if they still are in business at all.

Senator Corker’s joking admonition of Senator Schumer’s lack of “coffee” must be seen in this context. Those are some blaming words, Chuck, right on script for the media, but who’s really getting helped here? Who are you actually speaking for? What’s really going on?

It’s a question that every Senator on the Committee must think well on. Regardless of whether they have an R or D after their name, each is accountable. One cannot assume anymore, based on party alone, who is advocating for whom.

Senator Toomey asked this question more officially. “Who got helped here?” By QE. By everything around it. How do you measure that?

Sort of flips the media narrative, doesn’t it? Not quite what you expected. Perhaps we need more moments like this.

Chairman Yellen digressed somewhat in her initial answer to Senator Toomey; this was a wise strategic decision that was understandable. It was a sensitive question, and she showed skillful clock management, the same type I’d praise highly in an NFL coach who prepared well for an important game. In the second two answers, she answered more directly. That the Fed had not promoted excesses. That data had informed action.

Senator Toomey’s third question was, though a quick add at the end of his assigned time, deserving of its own hearing.

Somewhat paraphrased: “Would the behavior of the #Fed have been any different at all if the Fed had only a single mandate, price stability?”

Chairman Yellen’s response, whether you agree with it or not, was delivered confidently and in a way the market would have wanted. (I will further clarify that point upon request, but what I’m basically saying is that the moment was mutually beneficial to both Senator and Chairman, as all questions in these live broadcast settings ideally seek to be.)

It also led to a narrative that I expect we’ll be hearing more often: We’re not too sure that this jobs mandate is helping at all.

But we all agree on financial stability. System stability.

It’s already an implied mandate. Should Financial Stability, or System Stability be an official mandate?

Should it inspire a revision to a so-called jobs mandate that seems to have outlasted its original purpose?

Perhaps inherent in Toomey’s question was this: The jobs mandate, a Carter era effort which was not expected to be permanent, does not appear to be achieving measurable results. Secondly, and apart from Chairman Yellen’s assessment of current conditions, it can absolutely contradict the price mandate, the Fed’s original mandate. Some argue (in disagreement with Chairman Yellen’s comments) that it has in recent years, and that the notion that “all roads lead to accommodation” has missed the real problems, and even created new ones.

Toomey mentions that the ECB operates with a single mandate. Chairman Yellen replies accurately that other CBs also act with attention to the greater economy, the ECB included.

Which brings us back to Toomey’ s original question — how did QE benefit the greater economy, and how is that benefit evaluated? Did the Fed’s action, taken toward enabling rejuvenation of credit and hiring, fulfill the jobs mandate in a measurable way?

Following upon this: If helping the greater economy is the goal, then might a different sort of second mandate be in order? Alternatively, might a single mandate (original mandate) Fed be able to hand back the jobs policy obligation, which should be in the realm of Congress, back to Congress? Congress at this point is responding to Fed jobs mandate policy actions, in what all agree is a diluted and ineffective fashion (no, Senator Schumer, it’s not all because of gridlock.) The consequence has been an absence of fiscal policy and a drop in the perceived legitimacy of the Legislative branch.

If Congress once again “owned” this function, not just in theory but in practice, would this bring more effective results?
That’s not a simple question. But it deserves discussion. Clip of Senator Toomey’s exchange with Chairman Yellen is below. http://www.c-span.org/video/?c4485712/qe-quantifying-benefits

(To be continued. Is the Fed domestic or global, or both? Is it the FOMC’s job to delve into enforcement?)

Four

A decade or so ago I was at a party, and I was chatting in a group.
A man I’d never seen before came up and stood in front of a man standing near to me. He addressed him in a righteously agitated way, while paying no attention to the man’s wife who stood beside him. Or to me.

He had a question, and it seemed urgent.
“I’m having trouble with my Yahoo! email,” he said,” and I want you to fix it.”

He had a laptop bag with him. He wanted tech support. Right there. In a living room in a home just south of Stanford University.

He announced his need for tech support as if it were a fundamental right.

The courteous, unassuming man whose face he was all up in? Was Jerry Yang.

Jerry dealt with him politely, indicating that others could address his question.

The stranger went off in a huff, unsatisfied by the outcome, and surrounded by an awkward, staring and befuddled silence, of which I was uncomfortably a part. **

When Senator Elizabeth Warren questioned Chairman Yellen, I regrettably thought back to this real life scene.

Prior to her service in the Senate, Elizabeth Warren had some very noteworthy appearances in live hearings in Congress, in which she questioned some very difficult people about some very difficult things.

She stayed sharply focused on her points, and established a reputation for sticking with it, even if that meant making herself unpopular.

Which is why her two recent question sets to a highly professional (and for all purposes friendly) target — Nominee Dr. Yellen (November 2013) and Federal Reserve Chairman Yellen (February 2014) have surprised me.
Questions in such setting need not be artful, but they must be relevant. Warren was questioning a Chairman who already supports the very values she claims to uphold.

There was no sales job needed.

Yet what was proposed by Warren, an FOMC level delve into the micro of regional enforcement , was an odd backpedaling from an accord already achieved.
Back for a moment to the stranger who walked up to Jerry Yang:
Was the man’s desire for tech support good and right? Of course. If email doesn’t work, then the company must fix it.

This does not, however, justify walking up to a co-founder (and CEO) at a party, when tech support was available at no cost with one phone call.
Had Mr. Yang told him to forget tech support, he would have been calling the competence of his own team members into question. The man, in approaching Mr. Yang directly, inferred that he didn’t think much of lowly tech support either.
Which brings me to my question — does Senator Warren have a problem with the Fed’s regional oversight and enforcement? If so, then the question should have been asked accordingly. Instead, she asked the FOMC to engage an appropriately delegated operational function.

That’s different than fixing it. It’s a change to management structure, which may or may not have desired effect.
There’s a part of this topic that’s valid, and politically relevant. As Senators Joe Manchin (D-WV) and David Vitter (R-LA) brought up (Vitter with visual backup), the FOMC has generally included one or more with direct community banking oversight experience. The recent departures of Elizabeth Duke and Sarah Bloom Raskin (the latter to Treasury as Deputy) have left the committee with no such representation.
Do I personally think that it’s a good guideline to have community banking oversight experience be present on the FOMC?
Absolutely. Vitter had already asked this before Warren’s question time came up, and Chairman Yellen had already responded welcomingly to the idea.
But there’s a larger picture here as well.
As Senator Warren uttered her question, a man of questionable temperament and motives, one who has been threatening the future of the US Dollar as the reserve currency of planet Earth, was stomping into a smaller nearby nation. Putin. Ukraine. Does this have anything to do with the Fed? Oh yes. It does.
In an event of instability initiated by an egomaniacally unpredictable enemy of the US Dollar’s reserve status globally–there’s no such thing as an assumption of predictable, polite diplomacy. Or things happening on schedule.

Everything, including military action, is related to, you guessed it — the money.

Chairman Yellen, and her Vice Chair Dr. Fischer, once confirmed, are going to be focused on any number of events and effects related to a number of global hotpoints.

They will not just be supporting President Obama in his own decision process. They will be supporting the entire global financial system.
I think most people want both Chairman Yellen and Dr. Fischer to be focused on this. They do not want them to be proving their values by overseeing the minute details of a regional enforcement action somewhere in America.
This does not mean that I do not care about enforcement.
Like those serving on the FOMC, I care a lot about it, which is why I want the system and our currency to remain stable so that enforcement can happen at all.
Earlier, I shared a recent NYT piece by Neil Irwin which offers a balanced and helpful look at the international actions taken by the Fed in the whirlwind of Panic 2008. These actions were unique and in many ways unprecedented in purpose, speed and volume. I don’t think they will be the last of their kind.

The 2008 panic required the full attention of those involved. Having spoken to some who were far closer to this process at the time, I know (without going into details here) that basic everyday things, while important and even sacred, had to be put on hold. For the good of our country. And, as Irwin’s article noted, a whole lot of other countries too. I’m endeavoring to make this point as politely as possible. The Fed has — for ill or good — become a lot bigger than the sum of regional regulatory bodies.

Regional regulation is still vitally important, but one who wants to strengthen it is in no way served by degrading the performance of those working at the point of enforcement, or diluting the global role of those at FOMC level. It is not prudent nor practical to force these two Fed functions into competition, as Senator Warren’s question seemed to do.
The question actually works against the worthy objective I believe she intended: to increase accountability and stop real people from getting hurt by the jolts and starts of a rapidly evolving banking system.
That’s what her question should have been about. Accountability.
Not the opposite. Not about Chairman Yellen leaving her urgent scope of duty as a world leader (not exaggerating; she is one) to do a job that is purposefully assigned to someone else.
I used a more dramatic example last November in a walkthrough of the confirmation hearing I held in a café just off University Avenue.
I was asked by an advisee about Senator Warren’s (similar) question from Yellen’s confirmation hearing.
I said this. “Pulling a pilot out of the cockpit of a passenger plane to serve drinks at a busy, crowded moment in coach is really not sensible.”
Is it good that first class feels all buzzy while coach is thirsty? No. That’s not good. But it’s also ignoring a vital point. “If the whole plane crashes, no one’s getting their diet Coke.”
The one trained to fly the plane must fly it. If there is a specific functional area that needs to be improved, then the question should be worded toward that specific outcome.
A better question might have introduced a specific, unnamed case or two in which enforcement had been delayed or denied due to mid-tier enforcement’s inability to act. The question might be how to empower and respect those at enforcement point, and might request two or three specifics on how that might be done in the next, say, six months.

The Senator would look like she had done her homework, the Chairman would have expertly managed the answer, and that answer would probably have made the news. In ways that applied the right pressure in the right places. From a communications perspective? Win-win.
Chairman Yellen has assumed a challenging role at a challenging time; so will her pending Vice Chair and others who will soon join her on the FOMC. She will almost inevitably face a crisis as some of her predecessors have.

The Chairman may even face a challenge to the US Dollar’s role as the world’s sole reserve currency.

This arguably could be the biggest thing the Fed has ever seen. We hope this doesn’t happen- by lack of confidence, failed auction, sabotage, resource shock, cyberattack, military conflict, act of nature, or any horrific combination of those. But Chairs must worry about such things. They must stay in the watchtower; “they must occupy the lonely lighthouse and watch for a monster ship,” as I was told by a colleague recently. They must stay with the data and know when and how it informs wider action.

This is a larger topic which needs its own post. But what’s important to keep in mind is that tumult and upheaval of the financial kind rarely affects those in financial power except for a measured time.

Those who suffer most greatly or permanently from abrupt systemic change are often those most unprepared, most disenfranchised from the system.

It should be the focus of a self-proclaimed “populist” of any party to *balance* their view of the global and domestic roles, of the systemic and enforcement functions of the Federal Reserve, as values and objectives seek to influence the economy and its improvement. Clip of Senator Warren’s interaction with Chairman Yellen is below. http://www.c-span.org/video/?c4485800/fomc-duties-domestic-global