Yellen and Kohn Testify on How the Fed Can Reduce Economic Uncertainty

Janet Yellen delivered congressional testimony Tuesday for the first time as chair of the Federal Reserve Board, a semiannual report by the Fed to Congress known as the Humphrey-Hawkins testimony. In the House Financial Services Committee hearing, she was followed by Brookings Senior Fellow Donald Kohn and other economists.

In his testimony, Kohn said that the Fed’s firm hand on the economic tiller is still needed. Prospects for economic growth in the U.S. look a bit better, he said, but “with unemployment of labor and capital too high and inflation too low, a highly accommodative stance of monetary policy would seem to be called for some time to come.” Kohn said that the Federal Reserve can reduce economic uncertainty by focusing on its dual mandate but also in clearer communication of its policies and maintaining financial market stability.

Kohn outlined four ways that the Fed can achieve these goals:

1. By clearly communicating about policy. See Kohn’s paper about this issue earlier this year.
2. By focusing on employment and prices.
3. By maintaining financial stability.
4. By preserving its independence.

“We need to be very careful to safeguard the arms-length relationship of the Federal Reserve to the political process when it comes to setting the instruments of policy,” Kohn concluded his testimony, adding that:

Much evidence over time and across countries strongly indicates that leaving the setting of policy to technical experts with some separation from day to day political pressures produces much better outcomes than when elected officials, whose focus is on the next election cycle, can influence how policy is conducted in pursuit of agreed goals.

Kohn also reviewed the Fed’s policies of quantitative easing and forward guidance, the latter about which
David Wessel
, director of the
Hutchins Center on Fiscal and Monetary Policy
, wrote “
finally seems to be working
.”

In a recent Brookings Cafeteria podcast, Senior Fellow Sarah Binder addressed the relationship of the Federal Reserve to Congress as well,  point as well, saying that “we are beginning to see quite a bit that the Fed is very aware of what the Congress is doing, or not doing. And at least reading between the lines in the transcripts it does seem that they are very worried about not upsetting the members of Congress who oversee them.”

Listen to the podcast below to hear more. The conversation about Congress and the Fed begins at 10:20.

Binder also wrote about Yellen’s first testimony as Fed Chair, “Why It Matters What the Public Thinks about Janet Yellen“:

Even with a strong performance Tuesday morning, Yellen’s main political challenge lies ahead as she tries to steer the FOMC to the exit. The public will judge Yellen and the Fed by the results, ultimately shaping the Fed’s independence.

Get all Brookings research and commentary on the Federal Reserve.