5 takeaways from Janet Yellen's confirmation hearing to be Fed chairman

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With the rest of Washington focused on a health care speech from President Obama, Janet Yellen appeared before the Senate Banking Committee Thursday morning for a hearing on her nomination to be Federal Reserve chairman. Although Yellen did her best to avoid making any news that could affect markets, the hearing did provide a few hints about the odds of her nomination and also how she would run the Fed if confirmed.

1. Yellen played the part.

She appeared comfortable and confident handling questions from the committee's senators, including hostile ones from Republicans skeptical of the Fed's monetary stimulus programs and from Democrats pushing her on regulatory issues. She had to prove that she could handle such a situation without making any major misstatements that could cause confusion about the Fed's plans, and she appeared to do so.

2. She avoided any major missteps.

Several senators tried to get Yellen to hint at the Fed's plans for "tapering" its $85 billion monthly asset purchases. Yellen ably sidestepped questions that would have required answers that gave clues about the central bank's plans, saying there was no "set time" for the taper, but that the Fed would continued to weigh the costs and benefits of the program at each meeting. For now, she said, the benefits of quantitative easing outweigh the costs.

3. Senators are worried about asset bubbles, but Yellen isn't, at least for now.

Based on traditional methods of valuating assets, Yellen said, stocks are not "in territory that suggest bubble-like conditions."

Nevertheless, she acknowledged that the risk of bubbles forming is real, and will factor into her decision making. She said that the Fed has a "variety of tools" with which to address any run-up in asset prices that could threaten the financial system — and those include tightening money. “I would not rule out monetary policy as a tool to address asset price misalignments,” she told New Jersey Democrat Robert Menendez, cautioning that monetary policy is a "blunt tool" and that she would prefer to use it for promoting full employment and keeping inflation in check than for popping bubbles.

4. Yellen explained how she thinks quantitative easing works.

Yellen said she believes that quantitative easing stimulates the economy by lowering long-term interest rates. There are a number of different mechanisms through which quantitative easing could aid the economic recovery.

Yellen settled on one specific way: "The purpose of these purchases was to push down long-term interest rates," thereby helping consumers buy houses and cars, boosting those markets, she said. That underscores that she shares current Chairman Ben Bernanke's view of how quantitative easing works. It's an important point because long-term interest rates presumably would rise if the economy returned to full health.

5. The Senate doesn't care too much about monetary policy.

The majority of questions the Senate panel asked related to the Fed chairman's role as a regulator and supervisor of financial firms. Senators asked much more probing questions about how Yellen would regulate insurance companies and community banks than they did about monetary policy. Massachusetts' Elizabeth Warren, known as an aggressive critic of the big banks and of the oversight of the bailouts, suggested that Yellen's supervisory duties should take precedence over her management of the money supply.

"If the regulators had done their jobs and reined in the banks" during the financial crisis, Warren suggested, "we wouldn’t be talking about 'QE,' because we would have avoided the crisis altogether."

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