Janet Yellen is giving testimony in front of The Senate today as part of her confirmation process to be the next chief of the Federal Reserve.
Yellen is not expected to face much difficulty in getting confirmed, but the hearings still matter. In fact, they’re crucial.
Here’s why: We live in a world where monetary policy is dominated by forward guidance and expectations. In normal times, the Fed raises and lowers interest rates, and that’s pretty much that. But interest rates are basically at zero today, so the Fed has to conduct monetary policy in large part by jawboning and signaling what it will do in the future.
The implications of this are huge. Yellen’s words should not just be followed for the hints they will provide about what she will do as Fed chair. Yellen’s words should be followed since words are the core tool that the Fed possesses, and thus anything she says is actually exercising monetary policy.