“She’s tough and not just because she’s from Brooklyn,” said president Obama, giving the sub-editors a head start. Ok, so a 67 year old New Yorker who is married to Nobel Prize-winning economist George Akerlof. But what about her politics, and should we now be expecting tapering or rate hikes?
Yellen is seen as being a ‘dove’, less likely to be keen on raising interest rates early, and more concerned about tackling unemployment. Speculation is then that she will allow the inflation rate to exceed the 2% target before she raises the Fed funds rate.
So ‘Mellow Yellen’ then, as she’s been labelled in some quarters?
“The great concern about the politicisation of monetary policy is that interest rates will be too loose at the whim of the Government, helping them to be re-elected but risking inflation by doing so,” offers Guy Foster, head of portfolio strategy at Brewin Dolphin Investment Management.
The best candidate
“But on this score Yellen is a better candidate for the White House than most. She is a renowned dove, very much in the mould of her soon-to-be predecessor Ben Bernanke. So much so in fact that the portmanteau Yellanke is destined to be used to describe the monetary regime that spans the current phase of Fed policy.”
Foster believes Yellen’s appointment as chair of the Fed makes it likely that QE will continue to be used to support markets though, barring the most severe of catastrophes emanating from the current fiscal standoff, there will be significant pressure to taper once more as we edge closer to the end of the year – likely to cause much strife in markets.
For Russ Koesterich, BlackRock’s global chief investment strategist, Yellen is likely to approach the daunting task of winding down an era of ultra-loose monetary policies in a similar cautious fashion as Bernanke.
“With the President’s nomination of Yellen, we continue to believe that the Federal Reserve could begin tapering its $85bn-a-month bond purchasing program as soon as December and that its pace will likely be slow, and dependent on the strength of the US economy,” he says.
No hikes before 2015
“Further, a Yellen-run Fed would likely place significant weight on the second part of the Fed’s dual mandate, full employment, even at the cost of a temporary rise in inflation. We maintain our belief that rate hikes are unlikely to come before 2015.”
Hard to tell then what the implications will be for the US equity markets, though investors may be advised to steer clear until we have resolution on the debt ceiling crisis, with suggestions of any (remote) possibility of default bringing a downer on the end of Bernanke’s last term in charge.
