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What to expect in Yellen hearing: El-Erian

Janet Yellen
Kiyoshi Ota | Bloomberg | Getty Images
Janet Yellen

Janet Yellen's confirmation hearing on Thursday will be closely followed by markets that have become highly dependent on exceptional central bank support. Having said that — and political theatrics apart — we should expect few dramatic headlines and market-moving pronouncements. Instead, Ms. Yellen's testimony will likely affirm five points; they are well worth remembering when markets fret again about the Federal Reserve as they will inevitably do so in the next few months.

1. Janet Yellen is highly qualified to take over Ben Bernanke's job.

Thursday's hearing will quickly establish Ms. Yellen's outstanding credentials as an economist and a policy maker. Look for the discussion to highlight in particular her solid academic foundation, extensive policy experience, and sound judgment over many years — all of which speak to a smooth and credible leadership transition at a particularly tricky time for the Federal Reserve.

(Read more: Yellen's challenge at the Fed)

2. Evolution rather than revolution underpins her current policy orientation.

A co-architect of the current phase of the Fed's policy experimentation who also spearheaded the institution's communication strategy, Ms. Yellen is committed to the current policy approach. She believes it has played an important role in supporting an economy sadly burdened by low growth, excessive unemployment and worsening inequalities; and she is a strong advocate of continued accommodation notwithstanding the risk of collateral damage and unintended consequences.

3. She values the effectiveness of the Fed's committee setup.

Rather than try to force her priors on colleagues, Ms. Yellen will follow Mr. Bernanke in maintaining a collegial approach to decision-making. This is consequential at a time when conditions on the ground will inevitably call for complex judgment calls, and when markets are likely to take badly signs of material differences within the Federal Open Market Committee.

4. She does not consider inaction on the part of other policy-making entities a deal breaker.

Anchored by the confidence that comes with an "optimal control" framework, Ms. Yellen believes that the Fed possesses enough policy instruments to deliver on its dual mandate. Of course it would be better for our lawmakers to come together and help the economy (rather than continuously create headwinds). But the current congressional dysfunction, while highly regrettable, is not a sufficient reason for her to doubt the efficacy of Fed policy.

(Read more: Jobs shocker may force Fed's hand)

5. She sees little conflict at this stage between regulation and monetary-policy stimulus.

Ms. Yellen believes that financial soundness is essential for durable growth. And while regulatory overreach could undermine economic dynamism, she does not believe that the current phase of re-regulation is near this point.

If Thursday's hearing does indeed deliver on these five hypotheses, markets can look to a continuation of the Fed's current policy stance for now. When the time for taper comes, as it inevitably will, the central bank would partially compensate through more aggressive forward policy guidance. In doing so, it would also specify an additional set of intermediate policy targets.

(Read more: Summers: Fed should focus 'on spurring growth')

Unfortunately, none of this guarantees the much-needed handoff from low policy-induced growth to escape velocity powered by high, durable and inclusive economic expansion; nor does it mean that the Fed is immune to policy mistakes.

Look for Thursday's hearing to signal that, despite imperfect policy tools, the Fed is committed to keeping its foot on the accelerator even though outcomes may well continue to fall short of expectations, and even though the "costs and risks" are likely to rise. If it ends up making a mistake, something that it will try very hard to avoid, it would likely be one of excessive accommodation rather than pre-mature tightening.

(Read more: Op-ed: Taper or not, expect higher rates)

— By Mohamed El-Erian

Mohamed El-Erian is the CEO & co-CIO of Pimco. Follow him on Twitter @pimco.

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