Market predictions that Janet Yellen would continue Ben Bernanke’s stimulus policy proved correct today, as Obama’s nominee to succeed Bernanke testified before the Senate Banking Committee that she will continue the Fed’s bond-buying while the economy remains fragile. With unemployment as her primary focus, Yellen plans to continue stimulus indefinitely until the economy shows stronger growth.
While Yellen’s confirmation as the next Federal Reserve Chair was treated as given in her hearing earlier today, she was inundated with questions about the role Fed stimulus has had in widening income inequality and about stronger bank regulation. Yellen responded to the question of income inequality by stating that the Fed’s asset purchases “have made a meaningful contribution to economic growth.” With regards to regulating banks more strictly, Yellen didn’t provide much comment, owing to the fact that litigation resolving disputes from the financial crisis are still underway.
Other criticisms Yellen encountered in her hearing in Washington included worries that continued large-scale purchases by the Fed are fueling a bubble in stock prices. Yellen responded that while the stock market has rebounded strongly from its low during the financial crisis, stock prices have yet to reach “bubble-like conditions.”
In addition to insisting that long-term bond purchases will continue until economic growth picks up, Yellen also stated that even after longer-term bond buying tapers, the short-term rate will remain low even longer. On announcement of this news, the S&P 500 rose to a record high of 1790.62.
Fed stimulus is essential in an economy that still sees unemployment well above targeted levels without showing signs of overheating inflation. Yellen’s assumption of Ben Bernanke’s role will provide a degree of near-term market certainty by delivering a smooth transition from Ben Bernanke’s incumbency.