Ten Questions for Janet Yellen

by Iain Murray

With Janet Yellen now seemingly on course to be the next chairman of the Federal Reserve, it’s time to find out what she thinks about some very important questions of monetary and regulatory policy. So the Competitive Enterprise Institute’s brains trust got together and came up with these ten questions that she needs to be asked during her confirmation hearings:

  • A federal judge recently ruled the Fed’s implementation of Dodd-Frank’s Durbin amendment, which limits the interchange fees banks can charge retailers for using debit cards, has not gone far enough. The Durbin price controls already have resulted in massive fee hikes for other bank services, which harms poorer bank customers. Will you appeal this ruling to the Supreme Court if necessary? And given bipartisan opposition to the Durbin amendment (including from Barney Frank) will you ask Congress to relax or repeal the Durbin amendment?
  • There is bipartisan support for a full audit of the Fed by the Government Accountability Office. The GAO conducts such audits for virtually every other agency. Would you support such an audit for the Fed?
  • Lawmakers from both parties have said the proposed Basel III international capital rules are too rigid for business loans, and go too easy on government debt. Will you insist on changes before implementing the accords?
  • Banking capital requirements already are extremely complex, and may become even more so if the Basel III accords are adopted. This could introduce biases that lead to unintended consequences. How do you address that?
  • Quantitative easing has involved large-scale purchase of assets such as Treasury bonds and goverment-issued mortgage-backed securities to increase the money supply – or, in other words, printing money. Do you believe there is a sensible limit to this? What risks are associated with implementing this policy on so large a scale?
  • Numerous statutory bodies have some degree of regulatory power over banks in America. These include the Federal Reserve, the FDIC, the SEC, the CFTC, and many more. Are all these necessary?
  • Most observers expect you to pursue an inflationary boom, and this is likely a reason for your nomination. If your actions are already expected, won’t markets take these expected price changes into account in advance? And won’t this blunt the employment impact of any monetary expansion? Will you respond to these pre-existing expectations with unexpectedly high inflation?
  • When prices change, so do the decisions investors make. When unexpected inflation distorts those prices, do you believe the net effect of the altered investment decisions will be positive or negative?
  • The Fed has a dual mandate to pursue both low unemployment and low inflation. These two objectives can contradict each other, as when the Fed raises inflation to attempt to induce a boom. If forced to choose between keeping inflation or unemployment in check, which will you choose?
  • It takes time for monetary shocks to work their way through an entire economy. Quantitative easing, for example, immediately benefits large banks, which receive large cash inflows from selling securities to the Fed. The price of this benefit to large banks is harm to other economic actors further down the line who, through no fault of their own, are suddenly put in an inferior cash position. Do you believe this tradeoff is worth it?

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