NEW YORK (TheStreet) -- At a Senate confirmation hearing Thursday, Janet Yellen, the nominee to chair the Federal Reserve, plans to deliver a bearish assessment of the U.S. economy.
Wall Street is delivering a mildly bullish reaction, however, as traders interpret Yellen's remarks as an indication the central bank will continue its policy of quantitative easing. The Dow Jones Industrial Average was up 30 points, or 0.2%, at midmorning Thursday, while the S&P 500 was up nearly 6 points, or 0.3%.
In her prepared remarks, Yellen said that although progress has been made in the recovery from the Great Recession, the American job market and economy were still "performing far short of their potential."
Yellen said, "We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy."
Under Quantitative Easing III, announced in September 2012, the Fed purchases about $1 trillion annually of Treasuries and mortgage-backed securities that other investors won't buy at the prevailing interest rates.
Quantitative Easing III is needed as there is not enough demand from the market for Treasury debt with such a low yield. If there were, there would be no reason for the Federal Reserve or any central bank to embark on quantitative-easing programs.
The Federal Reserve's balance sheet has ballooned from around $700 billion in 2007 to about $4 trillion.
In an interview with The Wall Street Journal, George Schultz, who has served as Secretary of State and Treasury Secretary, warned, "It's startling that in the last year, three-quarters of the debt that's been issued has been bought by the Fed, and the balance has been bought by other countries, so U.S. citizens and institutions are not on net buying U.S. debt ... The Fed doesn't have an unlimited capacity because when it buys the debt what it's doing is monetizing the debt. Sooner or later that has to get out into the economy."
Richard Fisher, the president of the Dallas Federal Reserve issued a warning of his own in a recent speech: "The balance sheet is $4 trillion and there are limits to what the Federal Reserve can do."