Janet Yellen was confirmed on Monday by a vote of 56 to 26 to be the next chairman of the Federal Reserve. Her term as the first women to head the 100 year old institution will begin on February 1st. What should we expect from her?
Clarity:
Clarity and openness. Ben Bernanke has attempted, with Janet Yellen’s help, to clarify his statements. It doesn’t seem to matter how hard he tries, people still read whatever they want into the statements. Yellen will find this to be a challenge as well. We have no doubt, however, based on her past communications that she will try to be as forthright as possible.
Another challenge Bernanke has faced has been the fallout from other board members speaking publicly about their divergent views. While divergent views are expected and even desirable in the policy decision-making process, providing a united front to the public may help to quiet the rumor mill. In fact the Board’s policy reads in part: “They are free to explain their individual views but are expected to do so in a spirit of collegiality…”
Openness:
The Federal Reserve’s projections make it clear that it is expecting the pace of economic growth to speed up. It expects a decline in the unemployment rate and projects that inflation will get up closer to its 2% target than the 1% that we’ve been seeing. We also know that it has much more confidence in these projections than it did even just a year ago.
Vigilence:
We also know from the minutes of its December meeting that the Fed is keeping a mindful eye on financial bubbles, specifically in the stock market right now. We’ll bet Yellen will be on the lookout from every direction. Bubble is a scary word when talking about the economy, but being on the lookout for them is a good thing. Remember, Janet Yellen was one of the first to voice concerns about a housing bubble back in 2007. Nobody listened to her then… but they will now.
Tapering:
Given what we know and what the Federal Reserve is projecting, we can expect a gradual continuation of the decline in monthly bond purchases. It decreased by $10 billion in December and, depending on how the numbers come in, could possibly terminate by the end of this year. That should put an end to quantitative easing. Hopefully forever. The forward guidance on interest rates, however, looks like it will favor borrowers over savers for some time.
Prolonged Low Interest Rates:
What is some time? That’s hard to quantify. Consumers are spending again, but not like they were before 2008. A more optimistic outlook and a greater sense of wealth is beginning to come over consumers as their homes regain value. But with unemployment still high and inflation still low, we can expect the Fed Funds rate to stay at near zero until at least 2015, possibly even longer.
We’ll let Yellen summarize expectations: “I approach this task with a clear understanding that the Congress has entrusted the Federal Reserve with great responsibilities. Its decisions affect the well-being of every American and the strength and prosperity of our nation… The Federal Reserve plays a role too, promoting conditions that foster maximum employment, low and stable inflation, and a safe and sound financial system.”