Yellen says stronger job growth a Fed imperative

Reuters

* Yellen stands ground on Fed policy stimulus

* Critics of bond buying get few hints on tapering

* Yellen expected to win Senate confirmation

By Alister Bull and Jonathan Spicer

WASHINGTON, Nov 14 (Reuters) - Fed Vice Chair Janet Yellenon Thursday robustly defended the Federal Reserve's bold stepsto spur economic growth, calling efforts to boost hiring an"imperative" at a hearing into her nomination to become thefirst woman to lead the U.S. central bank.

Answering questions before the Senate Banking Committee,Yellen made plain she would press forward with the Fed'sultra-easy monetary policy until officials were confident adurable economic recovery was in place that could sustain jobcreation.

"I consider it imperative that we do what we can to promotea very strong recovery," Yellen told the panel.

If confirmed by the Senate, as widely expected, the formerprofessor and long-time public servant will become the mostpowerful woman in the history of world finance. She wasnominated by President Barack Obama to succeed current FedChairman Ben Bernanke, whose term expires at the end of January.

Financial markets watched Yellen's performance closely, bothfor clues on future policy and to see how she would stand upunder the pressure of the panel's questioning.

Investors liked what they heard, particularly her emphasison the need to drive a stronger recovery. U.S. stocks rose asshe testified, with the Dow Jones industrials and S&P 500index closing at fresh record highs.

U.S. Treasury debt prices also climbed, as did gold prices,while the dollar held earlier gains.

With her husband, Nobel-Prize-winning economist GeorgeAkerlof, seated behind her, Yellen appeared poised, calm andwell-prepared as she answered and parried some pointed butrespectful questions from the mostly male committee members.

The hearing largely lacked flashpoints and, importantly, theseasoned central banker made no missteps that might have rattledinvestors.

"This ain't her first rodeo," was the title of a researchnote from JPMorgan's Fed watcher Michael Feroli.

"SUGAR HIGH"

Yellen, who has served as the Fed's No. 2 official since2010 and who led the San Francisco Fed before then, has been astrong advocate of the U.S. central bank's aggressive andunorthodox measures to boost economic growth and employment.

The Fed has held interest rates near zero since late 2008and has quadrupled its balance sheet to $3.8 trillion throughthree massive rounds of bond purchases. Some Republicanlawmakers worry those actions risk stoking inflation or assetbubbles, concerns that were aired at the hearing.

"I think the economy has gotten used to the sugar you've putout there, and I just worry that we're on a sugar high," saidSenator Mike Johanns, a Republican from Nebraska.

Yellen admitted the bond buying, or quantitative easing,could not continue forever and said the Fed was acutely awarethe program had costs as well as benefits.

But she said the benefits outweighed the costs right now,and made clear there was no set timetable for reducing the Fed'scurrent $85 billion per month pace of purchases, saying anydecision would be driven by economic data.

"I do not see the program as continuing indefinitely,"Yellen said. "We ... are attempting to assess whether or not wehave seen meaningful progress in the labor market. And what the(Fed's policy) committee is looking for is signs we will havegrowth that is strong enough to promote continued progress."

Yellen said she did not believe that U.S. stocks or thehousing market were in bubble territory, and assured the panelthat the central bank would focus intently to spot any riskyinvestment behavior before financial stability was compromised.

"I absolutely believe that our supervisory abilities arecritical, and they're just as important as monetary policy," shesaid.

Yellen also said she would not rule out using monetarypolicy to prick future bubbles, although she said it was a blunttool that should only be used when regulatory measures fail.

RESPECTFUL TREATMENT

The banking committee, where Democrats occupy 12 of the 22seats, needs to vet Yellen's credentials before sending hernomination to the full Senate for consideration.

A committee aide said the panel could vote on Yellen asearly as next week, although a senior Democratic aide separatelysaid the full Senate would not be able to vote before theThanksgiving holiday at the end of the month.

Despite worries among some Republicans that she might not betough enough on inflation and asset bubbles, she is expected toeasily win confirmation.

Obama's Democrats and their allies control 55 of theSenate's 100 seats, which means the 67-year-old former economicsprofessor needs to win backing from only five Republicans toreach the 60-vote threshold necessary to overcome any proceduralhurdles.

The hearing, which lasted a little over two hours, featuredlittle of the hostile rhetoric that Tea Party conservativesfrequently level at the Fed, which they argue has enabled loosespending in Washington by keeping the government's borrowingcosts so low.

Including her prior stint at the San Francisco Fed and anearlier one on the Fed's Washington board, Yellen has served asa policymaker at the central bank for nearly 12 years.

At one point, Senator Bob Corker, a Republican fromTennessee and a critic of the Fed's current policies, went outof his way to point out she had never voted against an interestrate hike - offering her an opportunity to lean againstperceptions she is too dovish.

Corker voted against Yellen's nomination as Fed vice chairin 2010 and his office has previously said he would vote againsther again.

TOO BIG TO FAIL

One Republican panel member, Senator David Vitter ofLouisiana, said he would vote "no," in part because he did notbelieve Yellen would do enough to tackle the problem of banksthat are so big they could threaten the financial system.

"She made it crystal clear today that she would continue theFed's current policies of continuing 'Too Big To Fail' and freemoney, quantitative easing, with no wind down in sight," he saidin a statement.

For much of the hearing, lawmakers grilled Yellen about theFed's efforts to guard against a repeat financial crisis.

She defended the central bank's current course of pushingfor higher capital and liquidity at the biggest U.S. banks,which she said would help make those firms less risky. She alsohinted at additional measures that could be on the way.

For instance, Yellen said the Fed might issue new rules forWall Street's role in commodities trading once it finishes areview of banks' activities in that area. She also said banksthat rely on short-term wholesale funding could face additionalcapital or collateral requirements.

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