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Yellen wins backing of senators to lead Fed

Annie Lowrey Washington
The Senate confirmed Janet L Yellen as the chairwoman of the Federal Reserve on Monday, marking the first time that a woman will lead the country's central bank in its 100-year history.

As a Fed official, Yellen, 67, has been an influential proponent of the Fed's extraordinary measures to revive the economy, even though interest rates are already close to zero.

But as chairwoman, Yellen will face the arduous task of overseeing the gradual unwinding of those measures, despite an uncomfortably high unemployment rate of 7 per cent and subdued inflation.

During the confirmation process, senators from both sides of the aisle criticised the Fed for not doing enough to aid the economy and help middle-class Americans, and for trying to do too much, thus distorting the markets and risking new bubbles.

"I fear that they are already in way too deep," said Senator Charles E Grassley, an Iowa Republican, on the Senate floor, before the confirmation vote. Grassley questioned how the Fed would pull back on its recent campaign of large-scale asset purchases "without spooking investors," and whether that might stoke inflation.

5 FACTS ABOUT NEXT US FED CHIEF YELLEN
Following are five key facts about Janet Yellen, who is currently the vice-chair at the central bank
  • Yellen, 67, would be the first woman to head the Fed and one of the few to lead a central bank of a major economy.
  • She is seen as a dove on monetary policy, favouring strategies that bring down unemployment even at the risk of driving inflation higher.
  • She has extensive policymaking experience. Before her appointment as Fed vice-chair in 2010, Yellen took part in US monetary policymaking as president of the San Francisco Federal Reserve Bank from 2004 to 2010, and as a governor on the Fed board from 1994 to 1997. She also chaired President Bill Clinton's Council of Economic Advisers from 1997 to 1999.
  • Yellen is a widely respected economist. With a PhD from Yale, she has taught economics at the University of California, Berkeley, Harvard University and the London School of Economics (LSE). She has published research on topics as disparate as youth gangs, single mothers, optimal monetary policy, wage and price rigidity, and trade.
  • Economics saturates her personal life as well. She is married to, and has co-authored a number of papers with, Nobel Prize-winning economist George Akerlof, whom she met in 1977 when they were both economists at the Fed board. They married the following June and left the Fed to teach at LSE. Their only child, now a university economics professor, knew he wanted to go into economics by the time he was 13.
Source: Reuters
 
Despite those objections, Yellen won confirmation easily. Yellen was approved 56 to 26, with many senators kept away from the Capitol by inclement weather.

Nearly a dozen Republicans - including Kelly Ayotte of New Hampshire, Saxby Chambliss of Georgia and Tom Coburn of Oklahoma - crossed the aisle in support of Yellen. She will be the first Democratic nominee to run the Fed since President Jimmy Carter named Paul Volcker as chairman in 1979.

Still, Yellen's was the thinnest margin of Senate approval for a Fed chairman in the central bank's history. Ben S Bernanke, the most recent chairman, was confirmed for a second term with 70 yes votes and 30 no votes in 2010.

As a woman, Yellen will be a rarity among the world's central bankers, a club dominated by men. "Practically one hundred years to the day from when the Federal Reserve was created, the central bank finally has its first woman president," said Terry O'Neill, president of the National Organization for Women. "It's about time."

Yellen has been a powerful force in the Fed during the deep recession and sluggish recovery. She has argued for the central bank to provide more clarity to market participants and supported its campaign to soak up trillions of dollars of Treasury and mortgage-backed debt in order to bring down interest rates and spur investors to start spending.

She has also publicly expressed concern over the problems in the American labour market.

In particular, she has focused on the persistent high rate of long-term joblessness - which might scar the unemployed even after they find a job, depressing their earnings and even their children's earnings down the road.

The employment crisis "has imposed huge burdens on all too many American households and represents a substantial social cost," Yellen warned in a major speech last year.

"If these jobless workers were to become less employable, the natural rate of unemployment might rise," meaning a higher jobless rate and a less vibrant economy even during good economic times.

Her views have prompted speculation among market participants that Yellen - long considered a contender for the top position at the Fed - might be a stronger proponent for the Fed's extraordinary policies than Bernanke.

But their views have not differed all that much.

In December, Yellen joined Bernanke in supporting the Fed's decision to start tapering its purchases of Treasury and mortgage-backed debt to a pace of $75 billion a month from $85 billion a month. The decision came as new data showed stronger economic growth and a significant drop in the unemployment rate, to 7 per cent in November from 7.8 per cent a year before.

The Fed's decision "to modestly reduce the pace of asset purchases at its December meeting did not indicate any diminution of its commitment to maintain a highly accommodative monetary policy for as long as needed," Bernanke said in a speech this month, reflecting on his tenure. "It reflected the progress we have made toward our goal of substantial improvement in the labor market outlook."

The strategic shift will likely dominate the early part of Yellen's tenure, which is expected to start on February 1.

Fed watchers have warned that withdrawing support from the economy comes with significant risks. Pull back too soon and the economy could face subpar growth; Wait too long and the markets could overheat.

"The Fed will need to exercise caution as it scales back further on its pace of asset purchases," David J Stockton of the Peter G Peterson Institute for International Economics said in an analysis of the challenges that lie ahead for Yellen. "We have experienced several episodes in the past few years when a burst of favorable data led to increased optimism that soon proved unwarranted."

"The Fed could taper purchases now and then ramp them back up should economic results fall short," he continued. "But reversing course like that would be a difficult maneuver to execute and communicate."

There are already signs that the Fed's decision to ease up on stimulus has affected lending activity. Interest rates on 30-year mortgages jumped after Bernanke indicated that the Fed might start to reduce its asset purchases last year, although rates remain low by historical standards.

In her confirmation testimony, Yellen stressed that the Fed's extraordinary measures were bolstering growth, even if the pace of the economy's expansion had been frustratingly sluggish at times. She also said that the Fed's policies had helped not only Wall Street, but Main Street.

The bank's stimulus campaign has "made a meaningful contribution to economic growth," Yellen said. "The ripple effects go through the economy and bring benefits to, I would say, all Americans."

©2014 The New York Times News Service

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First Published: Jan 08 2014 | 12:13 AM IST

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