Janet Yellen’s confirmation hearings begin Thursday, and her prepared testimony is ready Wednesday. It’s mostly boilerplate, but it does contain three interesting points.
1. Her dovish reputation is overblown: She characterizes one important benefit of the Federal Reserve’s communications policy as “help[ing] anchor the public’s expectations that inflation will remain low and stable in the future.” In other words, to the extent that she supports monetary stimulus, she does so in part because she believes long-term expectations are in fact firmly anchored. She would not favor truly aggressive measures that, almost by definition, would risk de-anchoring expectations.
2. She supports the drive for tougher capital requirements: This is hardly a shocking development, but Yellen’s not really a bank regulator by trade or training, so it’s good to hear her specifically and repeatedly cite the importance of more bank capital (i.e., less borrowing) to systematic stability.
3. She thinks monetary policy should take financial stability into account: The recent trend on the Fed has been in this direction, and I think it’s wrong. But Yellen says: “the Federal Reserve has sharpened its focus on financial stability and is taking that goal into consideration when carrying out its responsibilities for monetary policy” and that she’s all for this. My view is that monetary policy should focus on inflation and employment, and the Fed should target regulatory issues with regulatory tools rather than monetary ones. But that kind of old-fashioned thinking is out of style these days.