At her confirmation hearing Thursday to become only the 15th chairman of the Federal Reserve Board and the first woman to head the agency, Janet Yellen would be wise to talk about the elephant in the room.
It’s not unemployment or inflation or how best to unravel the sticky quantitative easing wicket. Those topics will get a full airing at the Senate Banking Committee hearing.
But Yellen would do herself – and the Federal Reserve Board – some good by directly and adamantly asserting the central bank’s independence from the administration, specifically the Treasury Department.
(To see more posts from Barb Rehm's Blog, click here.)
Current Fed Chairman Ben Bernanke stressed the need for independence in his opening statement when Senate Banking considered his nomination to a first term in November 2005.
“In this prospective new role, I would bear the critical responsibility of preserving the independent and nonpartisan status of the Federal Reserve, a status that, in my view, is essential to that institution’s ability to function effectively and achieve its mandated objectives,” Bernanke testified. “I assure this Committee that, if I am confirmed, I will be strictly independent of all political influences and will be guided solely by the Federal Reserve’s mandate from Congress and by the public interest.”
But by December 2009, the goal seemed to slip to a lesser priority. This was about a year after the Fed had teamed up with Treasury to beg Congress for the $700 billion Tarp program.
During his confirmation hearing to a second term Bernanke simply concluded his opening statement with this sentence: “And as we move forward, we must take care that the Federal Reserve remains effective and independent, with the capacity to foster financial stability and to support a return to prosperity and economic opportunity in a context of price stability.”
It’s not uncommon for Fed chairmen to have close connections to the White House or the Treasury Department.
Bernanke chaired President Bush’s Council of Economic Advisors; Yellen held the same job under President Clinton and Alan Greenspan did it for President Ford. Paul Volcker worked at Treasury in the Kennedy administration.
In fact you have to go back to the late 1970s to find the last Fed chair who had not worked for the executive branch: William Miller. But Miller later moved from the Fed to become Treasury Secretary under President Carter.
Clearly, the ties between the executive branch and the Fed have always been tight.
But the 2008 financial crisis forced the Fed and Treasury into a too-cozy relationship, and the Dodd-Frank Act of 2010 cemented the alliance by creating the Financial Stability Oversight Council. The reform law put Treasury in charge of the council and forced the Fed to play the role of its chief executor. To get anything done, the two must work together.
The FSOC structure isn’t going to change during Yellen’s tenure, but she should use her confirmation hearing to make it clear she plans to push for more daylight between the Fed and Treasury.
They can and should be equal partners in the quest for financial stability. But as things stand now, Treasury dominates the Fed. Yellen ought to declare her intention to change that.
Confirmation hearings are typically defensive affairs. Nominees fend off questions, keeping answers as vague as possible to preserve flexibility in their new jobs. But Yellen should try a little offense.