May 06, 2014
Tomorrow morning, Federal Reserve Chair Janet Yellen will appear for the first time before Congress’ Joint Economic Committee. And on Thursday morning, she’ll testify before the Senate Budget Committee.
Especially after last week’s divergent economic data — slow 1st quarter economic growth, a robust increase in jobs, and a sharp drop in labor force participation — the financial markets likely will be hanging on her every word about the nation’s current economic outlook and the Federal Reserve’s future actions.
In advance of these hearings, here are some pertinent questions that could lead to some very interesting and enlightening responses:
- Since Shinzo Abe took over as prime minister in Japan, it has pursued a policy of aggressive fiscal stimulus, coupled with a central bank commitment to raising the inflation rate to 2.0 percent. This is in spite of the fact that its debt to GDP is more than twice as high as in the United States. Since then the economy has picked up and the employment to population ratio has increased by 1.6 percentage points. This would be the equivalent of more than 4 million new jobs in the United States. Do you think Japan’s experience offers any lessons for the United States?
- The Fed’s preferred measure of inflation, the core personal consumption expenditure deflator, has risen at just a 1.2 percent annual rate, well below the Fed’s 2.0 percent target. With inflation running below target would you view an uptick in inflation as a positive development rather than cause for alarm?
- One of the main factors that led to the financial crisis is that the investment banks issuing mortgage backed securities (MBS) faced little downside risk if these assets went bad. Are you concerned that giving the investment banks the option to issue MBS that would carry a 90 percent guarantee, as envisioned on Johnson-Crapo, will create an even worse problem of moral hazard?
- It appears that a core group of countries in the euro zone stand to move ahead with a financial transactions tax. This will lead to a modest increase in the cost of individual transactions and presumably a reduction in the volume of trading. If the United States were to impose a similar tax, would you be worried that the resulting decline in liquidity would obstruct the smooth working of financial markets?
