Yellen: Fed can’t be ‘prisoner to markets’

Janet Yellen’s bid to become the first female head of the Federal Reserve appeared to remain on track during her confirmation hearing on Thursday. [WATCH VIDEO]

Several members of the Senate Banking Committee pressed Yellen on the Fed’s monetary policy, economic outlook and financial oversight, but none challenged her experience or capacity to lead the nation’s central bank.

At the same time, Yellen defended the Fed’s controversial efforts to pump stimulus into the economy, saying she would support continuing the “quantitative easing” until the labor market was back to a healthy state.

She also pushed back against the idea that the central bank is beholden to the stock markets in setting policy.

“The Fed can’t be, or shouldn't be, a prisoner to the markets,” she cautioned, adding that she did not see evidence of any dangerous bubbles in the stock surge.

Most Republicans have been wary of the Fed's massive bond purchases, arguing the bank's multitrillion-dollar balance sheet is distorting markets and could wreak havoc on inflation and the nation’s economy when it stops.

“What happens when this morphine drip starts to end?” asked Sen. Pat Toomey (R-Pa.).

Sen. Mike JohannsMike JohannsTo buy a Swiss company, ChemChina must pass through Washington Republican senator vows to block nominees over ObamaCare co-ops Revisiting insurance regulatory reform in a post-crisis world MORE (R-Neb.) equated Fed policy with a “sugar high” for the economy, as GOP lawmakers pushed for a more restrained central bank.

But the Fed’s current vice chairman did not waver in her support for the program, saying its benefits exceed the risks. She added that if Republicans want the Fed to return to more typical policy, they should back its efforts to push the economy back on track.

She also refused to be pinned down on when the Fed may begin to scale back its bond purchases, after Chairman Ben Bernanke said earlier this year the central bank was beginning to consider that approach.

“If we want to get back to business as usual … we need to do that by getting the economy back to normal,” she said, adding, ‘I would argue we can’t have normal [interest] rates until the economy is normal.”

While the Fed missed the fledgling housing bubble that set the last crisis in motion, Yellen vowed that she would have the “courage” to tamp down any other bubbles that might emerge under her watch.

“I believe that I would, and I believe this is a most important lesson learned from the financial crisis,” she said.

Several of the Republicans on the panel indicated that they oppose her “dovish” tendencies to push economic growth over price controls, but there were few signs of a concerted effort by the GOP to upend her nomination.

Following Yellen’s testimony, a committee aide said the panel is looking to vote on her nomination as soon as possible. A vote could come as early as next week, according to the aide.

One lingering area of conflict is a growing push from conservatives to demand a vote on legislation that would fully audit the Fed before allowing a vote on Yellen.

Sen. Rand PaulRand PaulGOP rep: Trump has 'extra-constitutional' view of presidency The ignored question: What does the future Republican Party look like? Rand Paul skeptical about Romney as secretary of State MORE (R-Ky.), a longtime Fed critic, called for a vote on his legislation, and Sen. Ted CruzTed CruzLewandowski: Top Cruz aide advised Trump team before NH primary Five reasons why Donald Trump could be the 'Greatest Communicator' Victims of Nazi Art theft need Congress to HEAR MORE (R-Texas) has backed it. Similar legislation cleared the House in 2012 with a strong bipartisan majority, though Senate Majority Leader Harry ReidHarry ReidLawmakers eye early exit from Washington McCain to support waiver for Mattis, Trump team says Reeling Dems look for new leader MORE (D-Nev.) refused to bring it up in the Senate.

Yellen, like Bernanke, strongly opposes the bill. She argued that allowing Congress to fully audit all of the Fed’s operations, including its monetary policy decisions, could expose the independent institution to political pressure, rendering it less effective.

“Allowing a central bank to be independent in formulating monetary policy is critical to assuring markets and the public,” she said.

As a sign of the growing regulatory role the Fed faces in the wake of the financial crisis, Yellen fielded nearly as many questions on Wall Street oversight and she did on monetary policy.

She assured lawmakers that the Fed, like other regulators, learned plenty of lessons from the meltdown. She tried to assuage concerns from members that smaller institutions would be unduly burdened by new regulatory rules required by the Dodd-Frank financial reform law.

Yellen also said cracking down on the perception that large banks are “too big to fail” is a top priority, contending that influential institutions enjoy an unfair advantage in markets due to their implied government lifeline.

“Too big to fail is damaging. It creates moral hazard, it corrodes market discipline, it creates a threat to financial stability, and it does, unfairly in my view, advantage large banking firms over small ones,” she said.

At the same time, she said the Fed and other regulators were making progress in addressing that issue.

— This story was updated at 2:22 p.m.