Janet Yellen is answering Senator’s questions this week. Here are a few that I would love to ask:
1. Is there any limit to the Fed’s balance sheet? Before the crisis the Fed owned about $900 billion in securities. In five years that has more than quadrupled to $3.8 trillion. Has anyone ever done this before? How big is too big?
2. Is the Fed’s supervisory role compromised by its monetary mandate? Might bank regulators be tempted to go easy at the wrong time? Is this a public choice problem?
3. Speaking of regulation, what do you think of the Consumer Finance Protection Board? It’s nominally under the Fed. What tools or training does the current Fed need to oversee this new agency?
4. Finally, what is the mechanism that translates asset purchases by the Fed (QE) into higher employment? How do lower mortgage rates and higher stock prices create middle-class jobs? Are we trying to spin straw into gold?
I have great respect for Dr. Yellen’s work; I believe that she will make fine Fed Chair. (Anyone wanting to read her speeches can go here or here.) But we’re in uncharted policy waters. I don’t think anything like these questions will be asked. But it would be great if they were.
Douglas R. Tengdin, CFA
Chief Investment Officer