Yellen’s over, now the work begins

Janet Yellen was sworn in as the first woman to head the United States Federal Reserve on Monday, ascending to the top job at the central bank at a time when the American economy seems to be on a firmer footing but investors are worrying about China and other emerging markets.

Yellen, 67, was sworn in by the Fed governor, Daniel Tarullo, the most senior member of the Fed's seven-member board, in a brief ceremony in front of a fireplace in the Fed's massive boardroom. Her husband, the Nobel-winning economist George Akerloff, was present. She made no remarks.

Yellen will immediately have her work cut out for her. On February 11, she will appear before a congressional committee to answer questions about the economy, her policy views and regulation.

She will then have to begin preparing for her first meeting as chairperson of the federal open markets committee, which sets interest rates and monetary policy. That meeting, on March 19 and 20, will be followed by her first press conference as Fed chairperson.

Yellen takes control as the central bank has begun to unwind its massive economic stimulus programme, known as quantitative easing (QE). Yellen was a staunch supporter of QE as vice-chairperson to her predecessor, Ben Bernanke.

Started in September 2012, the third round of QE saw the Fed buying $85-billion a month in mortgage bonds, treasuries and other securities in order to keep rates down and stimulate investment.

Signs of improvement in the economy
Last month the Fed trimmed back the amount to $65-billion, as it said there were "cumulative" signs of improvement in the economy. Gus Faucher, a senior economist at PNC Bank, said Yellen was now involved in a delicate balancing act.

"She has to unwind QE slowly enough so that the recovery doesn't stall while making sure that she moves quickly enough that inflation doesn't rise," he said.

The unwinding has already sparked unintended consequences overseas. Yields on US treasuries and other bonds have risen as QE has been cut and as a result investors who were looking for higher yields in markets such as Turkey and South Africa have moved their cash back to the US.

The shift has rattled emerging markets and US investors but Faucher said that was not Yellen's primary concern.

"I think we can expect to see more of that," he said. "There's no question that the Fed's efforts are causing problems for emerging markets but Yellen's mandate is for the US."

The next big test of the health of the US economy comes on February 7 with the release of the non-farm payroll figures for January.

Disappointing number of jobs created
The tally of the number of new jobs created in December was a disappointing 74 000, far below the 200 000-plus the US had added in recent months.

At the time of the release of the December numbers, many economists were keen to characterise that report as an anomaly.

Since its publication, the commerce department has released figures on the gross domestic product, which showed that GDP grew at its strongest rate since 2005 in the last six months of 2013.

But the December jobs report also revealed that the number of people in the workforce was now at levels not seen since the 1970s, suggesting that many have given up looking for work.

Dan Greenhaus, the chief global strategist at the broker BTIG, said the extreme cold weather currently affecting much of the US could impact the non-farm payrolls.

He is expecting a number less than the 190 000 economists polled by Bloomberg are predicting.

Cuts to QE
The cuts to QE will take quarters, not months, to show their true impact on the economy, said Greenhaus.

"Most people see monetary policy as having a 12- to 18-month lag," he said.

In the meantime, Yellen will be "interpreting economic data in real time". "She has a month and a half," said Greenhaus. "A lot can happen in a month and a half." — © Guardian News & Media 2014

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