Janet Yellen testifies this morning at 10 AM ET before the Senate Banking Committee as the first step in the process for confirming her as the next chairman of the Federal Reserve.
The one question we want to ask the woman who is about to become one of the most powerful people in the world was posed in a Bloomberg View column by Matthew C. Klein this morning.
It’s actually a two-part question — Klein writes: “Before the crisis, most central bankers and economists thought bubbles should be ignored until after they burst. Is your view the same as it was then? How should the Fed evaluate the hypothetical trade-off of slower growth during the good years in exchange for a lower likelihood of financial crisis during the bad years?”
This question is important on a number of levels.
The first part is important because the answer governs a big part of the interaction between the central bank and market participants, something we’ve seen play out in a pretty dramatic fashion over the course of 2013.
In June, market participants were led to believe that the costs of the Fed’s bond-buying stimulus program known as quantitative easing were beginning to outweigh the benefits. They then positioned for a tapering down of QE at the FOMC’s September meeting, and were completely caught off guard when the Committee elected not to taper.
If market participants knew the answer to the question “should bubbles be ignored until after they burst,” then this confusion likely would have been avoided, and the Committee’s intent would be more clear.
But the second part of the question, which follows naturally from the first part, is perhaps even more important because it gets to the heart of the debate surrounding the value of quantitative easing, regardless of your opinion on the mechanisms by which QE is supposed to stimulate the economy.
Why? Because we exist in a slow-growth environment now, and returning to the pre-crisis norm would likely require parts of the economy that many view ex-post as having been in a bubble before the crisis to reflate again.
So, how does the FOMC see it? What’s the plan?