To the great surprise of nobody, the first Democratic Party nominee for the post of Chairman of the Federal Reserve since Paul Volcke left the office back in 1987 has been confirmed by the Senate. Janet Yellen, currently service as a vice chairman of the Federal Reserve, is set to take over the helm when Ben Bernanke steps down at the end of the month. Janet Yellen will become the first woman to lead the Federal Reserve in its 100 year history and it is widely expected that she will continue with the approach that Bernanke has adopted.
Ms Yellen won the confirmation vote comfortably by 56 votes to 26 although some senators were unable to attend the vote due to the extreme winter conditions that the States are experiencing right now (which will have an influence on economic output if it should continue for much longer). She is credited with a long term focus on unemployment and will be cautious about rolling back the Federal Reserve’s asset purchase programme before the downward trend in unemployment is clearly established. The first stage of the “Taper” saw a reduction in the asset purchase programme from $85 billion to $75 billion with effect from this month. The trigger for such a reduction was originally set to unemployment falling to 6.5%, but the Fed judged that economic conditions were strong enough for a cautious start to the Taper.
Quantitative easing measures (QE) have left the Federal Reserve with $4 trillion of assets on its books, purchased with money “created” under QE. These assets will generate real yields and can fluctuate in value, of course. The point of QE was to enhance liquidity in the US economy and keep the cost of borrowing low – noble ambitions, but the consequences of doing this with (if you will) imaginary money are not altogether clear. In the longer term, creation of money (from thin air – or, if we are less poetic about it, electronic generation of credit) runs the risk of sparking hyper-inflation. This was seen in the Weimar Republic in the lead-up to the Second World War, so the intention was that the additional money generated under QE would be re-absorbed – but this is not true of the assets it generates, of course. It will be Ms Yellen’s responsibility to try to re-pack Pandora’s box…