Yellen can expect to face complex challenges at Fed

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WASHINGTON -- If she becomes the next Federal Reserve chair, the challenges that lie ahead for Janet Yellen will require both the steely intellect and the personable style that many attribute to her.

The job as the world's most important banker comes with a daunting to-do list: deciding when to slow the Fed's stimulus, forging consensus from a fractious policy committee and calculating the effects of any economic slowdown from Washington's budget fight. That's in addition to monitoring volatile financial markets and fine-tuning the Fed's communications.

First, though, Ms. Yellen will have to overcome Washington's toxic political environment and win Senate confirmation to succeed Ben Bernanke when his term ends Jan. 31. It's almost enough to make you wonder why she would want the job.

Ms. Yellen stresses the need to use the Fed's tools to boost growth and reduce unemployment in the sluggish aftermath of the Great Recession, rather than worry about igniting future inflation. That view came through in her brief remarks Wednesday after President Barack Obama announced her nomination. She said more needs to be done to strengthen the economy, but added: "We have made progress. The economy is stronger, and the financial system is sounder."

Ms. Yellen has been outspokenly backed by many Democrats in Congress and opposed by some Republicans. But Brian Gardner, Washington political analyst for Keefe, Bruyette & Woods, predicts that the widely respected as an academic economist and veteran policymaker will be easily confirmed, despite some GOP no votes. Then the hard stuff starts.

Fed policymakers have been debating when and how to reduce their $85 billion a month in bond buys meant to spur growth by cutting long-term interest rates, spiking stock prices and encouraging borrowing and spending. Ms. Yellen was a key architect of this strategy.

Last month, the Fed surprised financial markets by deciding not to scale back its bond purchases, concluding that the U.S. economy wasn't yet healthy enough for the Fed to ease its stimulus. Fed officials also worried about the budget stalemate that has since led to a partial government shutdown and threatens to trigger a government debt default. Many analysts now don't think the Fed will trim its stimulus before next year. And with Ms. Yellen as chairman, the Fed would likely be cautious about any pullback in early 2014.

The choice of Ms. Yellen to lead the Fed comes amid uncertainty about how much damage the shutdown might cause the U.S. economy. Graver yet is fear that lawmakers won't raise the government's borrowing limit this month. If they don't, the government could eventually default on its debt, possibly causing another recession and financial crisis. But as chairman of the Fed, an independent agency that steers clear of Congress' affairs, Ms. Yellen is little more than a spectator.

One especially delicate challenge for Ms. Yellen will be to refine the Fed's public communications. Mr. Bernanke opened the once-secretive Fed to far more public scrutiny. He was the first chairman to hold regular news conferences, and the Fed went much further to signal likely policy actions.

This hasn't always gone smoothly. The Fed sometimes rattles investors, instead of calming them. A finely calibrated communications strategy will likely be high on Ms. Yellen's list of goals.

Further down the list could be the huge challenge of how and when to start shrinking the Fed's portfolio of bonds.

The Fed's purchases have swollen its investment portfolio to $3.7 trillion, a record by far. Eventually, perhaps under Ms. Yellen, the Fed will have to start unloading the bonds without shaking financial markets.

Most analysts say they are confident Ms. Yellen can handle the many challenges.

"By temperament, by mannerism and by extensive experience, I think she is better prepared for that job than almost anybody on the face of the earth," said Princeton University economist Alan Blinder, a former Fed vice chairman who served with Ms. Yellen at the Fed in the 1990s.

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First Published October 9, 2013 9:05 PM


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