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Yellen Gets the Megaphone

NEW YORK (TheStreet) -- Today Janet Yellen is learning the difference between being the Fed's No. 2 and putative No. 1. Where a year ago she had a pen, and an audience of hundreds, now she has a megaphone and an audience of millions.

In her first statement before today's Senate hearing on her nomination, Yellen defended the policies of her predecessor, Ben Bernanke, adding that unemployment is still too high and inflation remains low.

So what happens next?

There were lots of theories before the hearing as to how things might go. Most involved questions about the Federal Reserve's Quantitative Easing policy, and its regulation of big banks.

But here's a question I haven't seen asked. Is Yellen going to play offense or defense? Her statement indicated she could go either way. What she gave in answer to questions was Bernanke's policy, but in plain English.

Several Republicans, like Idaho Sen. Mike Crapo, were ready with demands that Quantitative Easing stop because it supposedly causes inflation.

In response Yellen said the Federal Open Market Committee looks at the risks of QE at every meeting, that it increasingly focuses on risks of asset bubbles, but has not yet seen evidence of them.

The discussion of QE could easily have put Yellen on the defensive. She defended it vigorously.

"When we initiated this program, the unemployment rate was 8.1%," she noted, and it's now at 7.3%. "At each meeting we are attempting to assess whether we've seen progress in the labor market. What the committee is looking for is continued progress." When critics of QE pointed to the stock market, Yellen pointed to better housing prices creating a wealth effect that is helping recovery.

When Sen. Pat Toomey (R-PA) asked, "what happens when this morphine drip ends?" she did not back down, either. "Lower rates hurt savers, that's absolutely true, but I would argue that we can't have normal rates unless the economy is normal," she said.

Yellen also faces critics who want to know how she'll handle "too big to fail," a new mandate created by the Dodd-Frank law. This criticism is expressed best, I think, by our own William Inman.

"Bernanke leaves one giant gap in his resume, namely the failure of the Fed under his leadership to impose tougher standards on large banks and institutions," Inman writes.

Yellen's initial answers, in response to questions from Sen. Richard Shelby (R-ALA), indicated support for Basel III, the rules requiring big banks to hold more capital. "Those banks whose actions can create financial stress will be asked to hold more capital," she told him. As she later told Sen. David Vitter (R-LA), the Fed believes in a "belt and suspenders approach" to regulating big banks, with multiple safeguards in place.

Later, in response to a question from Sen. Sherrod Brown (D-Ohio), she condemned Too Big To Fail and said the Dodd-Frank law gives her tools to address it. "Dodd-Frank put in place an agenda that, as we complete it, should make a meaningful difference," she said, adding she will also work with foreign regulators to increase capital requirements on big banks.

In response to Sen. Elizabeth Warren (D-MA), who wanted the Federal Reserve to focus more on supervision and regulation, Yellen defended her board, but insisted that supervision will be more immediate and regulation more stringent under her leadership.

"We've learned a lot about supervision" since the crash, she said. "One of our top priorities is ramping up our monitoring of the financial system as a whole to detect financial stability risks. We didn't do that before the crisis and missed some important linkages." Sen. Warren seemed to like the answer.

Most Federal Reserve chairs tend to be oracles. Ben Bernanke, despite his Washington reputation for straight talk, was still seen as opaque by ordinary people. He never wanted to rock the congressional boat any more than was necessary for him to do his job.

In her first test before Congress, Yellen seemed to favor straight talk, rather than remain a distant and imposing figure, understood only by experts. When punched hard by Congress, she punched back.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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