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Five experts on how 'outstanding' Yellen will shape history
on Oct 10, 2013 at 13:18
We highlight some of the top reactions to the historic announcement that Janet Yellen has been nominated to replace Ben Bernanke as chair of the Federal Reserve.
Barack Obama will nominate experienced Federal Reserve vice-chair Janet Yellen to be the next head of the US central bank. Described as an ‘outstanding candidate’ by Capital Economics, Yellen still needs to be approved by the senate before she becomes the first woman to head the Fed in its 100-year history.
Will US monetary policy change and if so, how? Pimco founder and co-chief investment officer, Bill Gross tweeted: ‘Now that she's made history how will she shape history? More doveish than Bernanke but running outta ammo. Depends on forward guidance.’
Click through to find out what these five experts reckon.
Trevor Greetham, head of asset allocation, Fidelity
‘The Fed’s decision to delay a reduction in the pace of quantitative easing coupled with the much anticipated nomination of Janet Yellen as Fed chair could mean the recent phase of dollar weakness continues in the short run.
‘However, we believe a multi-year bull market for the dollar began in 2011 and it will resume before long. With home prices rising and the economy shrugging off spending cuts, the US economy is escaping from the debt trap. Interest rates are likely to rise in America before they do in the other major economies where growth is weaker.
‘A period of dollar weakness should create an opportunity to buy US equities. It should also allow investors to increase exposure to Japan at the expense of Emerging Market equities. Emerging markets tend to underperform when the dollar is strong as portfolio capital returns to America and commodity prices fall. Japan on the other hand benefits directly both from the impact of yen weakness on the export sector and from a lower price of commodity imports.’
Russ Koesterich, chief investment strategist, BlackRock
‘As Federal Reserve chairman, we would expect Janet Yellen to approach the daunting task of winding down an era of ultra-loose monetary policies in a similar fashion as her predecessor—with caution.
‘With the president’s nomination of Yellen, we continue to believe that the Federal Reserve could begin tapering its $85 billion-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.
‘Further, a Yellen-run Fed would likely place significant weight on the 2nd 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.’
Mike Jennings, chief investment officer, Premier
‘The nomination of Janet Yellen to replace Ben Bernanke as chairman of the Federal Open Markets Committee was widely anticipated, since Larry Summers withdrew himself from the running a month ago. Yellen is the ‘safe’ choice in this regard, having been vice-chair of the Fed for three years, and also having served as an economic advisor to Bill Clinton’s administration in the late 1990’s. As such, she will be seen as being a more experienced chairman then many of her predecessors.
‘Yellen is seen as being in the ‘dove’ camp, and therefore is likely to be less keen to be early on raising interest rates and more concerned with encouraging employment. Indeed in this regard, it is highly possible that she will allow the inflation rate to exceed the 2% target before she raises the Fed funds rate.
‘In the short term, whilst the markets are worried about US government shutdown and the looming debt ceiling, the next issue on the minds of US market watchers is tapering of quantitative easing. Current Fed chairman, Ben Bernanke will remain in place for many months to come, so the question is whether he will act on tapering at the end of his tenure or leave it to Ms Yellen. The good news for the markets is that this may well now be pushed out until 2014.’
Julian Chillingworth, chief investment officer, Rathbones
‘Markets have reacted positively to the news of president Obama’s nomination of Janet Yellen. She is seen as dovish and similarly technocratic to Bernanke. But we believe the market may have overestimated how dovish she might be, given her history and the fact that these are interesting times requiring interesting measures.
‘Furthermore, investors should not overlook the impact of January’s annual rotation in voting members; every year, the eleven regional Fed bank presidents, other than the Federal Reserve Bank of New York, rotate into the four one-year voting positions on the FOMC.
‘This is likely to mean that the FOMC is likely to become more hawkish, which could have implications for both tapering and the timing of rises in US interest rates. We will be monitoring whether this is disruptive to the current accommodative stance of the Fed, or whether it is just proves a useful tool in dampening inflation expectations.’
Paul Dales, senior US economist, Capital Economics
‘The outlook for monetary policy will be little changed when Janet Yellen replaces Ben Bernanke as Fed chair at the end of January. At this stage, Yellen is unquestionably the best candidate. But there is a slightly bigger risk that under her stewardship, the Fed will fail to tighten monetary policy in time once the recovery gathers momentum, eventually triggering an unwanted surge in inflation.
‘The news that President Obama will nominate the current Fed vice chair Yellen as the new chair should ensures a seamless transition from one chair to another with similar views and beliefs. That said, Yellen may place a bit more weight on the high unemployment rate and the effectiveness of forward guidance. In a speech in 2012, she showed how committing to keep rates low for longer than a policy rule would suggest, such as the Taylor Rule shown in Chart 1, would be better for the economy. Under Yellen, tapering may take place a little later than otherwise and the first rate hike may be delayed. But this is marginal, as shown by the tiny fall in market interest rate expectations. (See Chart 2.)
‘Overall, Yellen’s nomination doesn’t change our view that interest rates will remain at rock bottom for at least another 18 months and rise only gradually after that. That said, we still think that, unless it is willing to allow inflation to climb well above its 2% target, the Fed will need to raise rates more aggressively in 2015 than its current projections suggest.’