By Alister Bull and Jonathan Spicer
WASHINGTON, Nov 14 (Reuters) - Fed Vice Chair Janet Yellen on Thursday robustly defended the Federal Reserve's bold steps to spur economic growth, calling efforts to boost hiring an "imperative" at a hearing into her nomination to become the first 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's ultra-easy monetary policy until officials were confident a durable economic recovery was in place that could sustain job creation.
"I consider it imperative that we do what we can to promote a very strong recovery," Yellen told the panel.
If confirmed by the Senate, as widely expected, the former professor and long-time public servant will become the most powerful woman in the history of world finance. She was nominated by President Barack Obama to succeed current Fed Chairman Ben Bernanke, whose term expires at the end of January.
Financial markets watched Yellen's performance closely, both for clues on future policy and to see how she would stand up under the pressure of the panel's questioning.
Investors liked what they heard, particularly her emphasis on the need to drive a stronger recovery. U.S. stocks rose as she testified, with the Dow Jones industrials and S&P 500 index 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 George Akerlof, seated behind her, Yellen appeared poised, calm and well-prepared as she answered and parried some pointed but respectful questions from the mostly male committee members.
The hearing largely lacked flashpoints and, importantly, the seasoned central banker made no missteps that might have rattled investors.
"This ain't her first rodeo," was the title of a research note from JPMorgan's Fed watcher Michael Feroli.
Yellen, who has served as the Fed's No. 2 official since 2010 and who led the San Francisco Fed before then, has been a strong advocate of the U.S. central bank's aggressive and unorthodox measures to boost economic growth and employment.
The Fed has held interest rates near zero since late 2008 and has quadrupled its balance sheet to $3.8 trillion through three massive rounds of bond purchases. Some Republican lawmakers worry those actions risk stoking inflation or asset bubbles, concerns that were aired at the hearing.
"I think the economy has gotten used to the sugar you've put out there, and I just worry that we're on a sugar high," said Senator Mike Johanns, a Republican from Nebraska.
Yellen admitted the bond buying, or quantitative easing, could not continue forever and said the Fed was acutely aware the 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's current $85 billion per month pace of purchases, saying any decision 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 we have seen meaningful progress in the labor market. And what the (Fed's policy) committee is looking for is signs we will have growth that is strong enough to promote continued progress."
Yellen said she did not believe that U.S. stocks or the housing market were in bubble territory, and assured the panel that the central bank would focus intently to spot any risky investment behavior before financial stability was compromised.
"I absolutely believe that our supervisory abilities are critical, and they're just as important as monetary policy," she said.
Yellen also said she would not rule out using monetary policy to prick future bubbles, although she said it was a blunt tool that should only be used when regulatory measures fail.
The banking committee, where Democrats occupy 12 of the 22 seats, needs to vet Yellen's credentials before sending her nomination to the full Senate for consideration.
A committee aide said the panel could vote on Yellen as early as next week, although a senior Democratic aide separately said the full Senate would not be able to vote before the Thanksgiving holiday at the end of the month.
Despite worries among some Republicans that she might not be tough enough on inflation and asset bubbles, she is expected to easily win confirmation.
Obama's Democrats and their allies control 55 of the Senate's 100 seats, which means the 67-year-old former economics professor needs to win backing from only five Republicans to reach the 60-vote threshold necessary to overcome any procedural hurdles.
The hearing, which lasted a little over two hours, featured little of the hostile rhetoric that Tea Party conservatives frequently level at the Fed, which they argue has enabled loose spending in Washington by keeping the government's borrowing costs so low.
Including her prior stint at the San Francisco Fed and an earlier one on the Fed's Washington board, Yellen has served as a policymaker at the central bank for nearly 12 years.
At one point, Senator Bob Corker, a Republican from Tennessee and a critic of the Fed's current policies, went out of his way to point out she had never voted against an interest rate hike - offering her an opportunity to lean against perceptions she is too dovish.
Corker voted against Yellen's nomination as Fed vice chair in 2010 and his office has previously said he would vote against her again.
TOO BIG TO FAIL
One Republican panel member, Senator David Vitter of Louisiana, said he would vote "no," in part because he did not believe Yellen would do enough to tackle the problem of banks that are so big they could threaten the financial system.
"She made it crystal clear today that she would continue the Fed's current policies of continuing 'Too Big To Fail' and free money, quantitative easing, with no wind down in sight," he said in a statement.
For much of the hearing, lawmakers grilled Yellen about the Fed's efforts to guard against a repeat financial crisis.
She defended the central bank's current course of pushing for higher capital and liquidity at the biggest U.S. banks, which she said would help make those firms less risky. She also hinted at additional measures that could be on the way.
For instance, Yellen said the Fed might issue new rules for Wall Street's role in commodities trading once it finishes a review of banks' activities in that area. She also said banks that rely on short-term wholesale funding could face additional capital or collateral requirements.