It’s official. Janet Yellen is the first woman chair of the US Federal Reserve and that’s no mean feat!
As Barack Obama’s choice to succeed Ben Bernanke, she took the reins on 1 February 2014 after the US Senate not surprisingly confirmed her appointment!
Her biggest short-term challenge? To pare back (or taper) the US Federal Reserve’s massive bond-buying stimulus program from US$85 billion per month to US$75 billion, and the rest.
Under Ben Bernanke, the Fed’s controversial bond-buying program had been under scrutiny since its introduction during the GFC. But the economic mood remains fairly positive and there’s some evidence the US economy is almost ready to stand on its own two feet.
What will happen?
The first steps in scaling back the bond-buying program started in January. But don’t worry, unlike the real game of ‘paper, scissors, rock’, the taper is not based on any coin flipping or dice throwing! It’s a strategy that uses a high degree of skill! Just ask Janet Yellen.
The US Federal Reserve’s FOMC (Federal Open Market Committee) will ‘modestly reduce’ the pace of its asset purchases and add to its holdings of agency mortgage-backed securities. To start off, the Fed will reduce purchases by US$5 billion per month to US$35 billion per month and holdings of longer-term Treasury securities from US$45 billion per month to US$40 billion per month.
They say the best indicator of a policy shift is hidden in the Fed’s FOMC statement. Some people spend a lifetime analysing these statements, but on 18 December 2013, the FOMC statement couldn’t have been any clearer! There’ll be no change to the Committee’s support for progress toward maximum employment and price stability, meaning, their policy actions will continue to be determined by the labour market and inflation.
Their view is that a highly accommodative stance on monetary policy is the right strategy for now and for a considerable time after their asset purchase program ends. And, there’s no surprise that the current low target range for the federal funds rate of 0.0% to 0.25% will remain, so long as the US unemployment rate remains above 6.5%. Whew!
On 12 February Janet Yellen’s first official communication on monetary policy confirmed this stance and as a result, markets went up! As predicted, she’s not planning to make any policy changes just yet. The Fed will continue to slowly taper its stimulus while keeping a close eye on the labour market. Janet said ‘I expect a great deal of continuity in the FOMC’s approach to monetary policy’. The market loves certainty. Go Janet!
Expect some instability though as the market fully adjusts to the taper challenge. But that’s normal, that’s the market. The market has known about this for some time, and in many ways, has already factored in a slow tapering.
What is monetary policy and the FOMC?
Monetary policy is the action taken by a central bank to influence the availability and cost of money and credit in an economy. In the case of the US, the Federal Reserve Act of 1913 gave the Fed responsibility for setting monetary policy. The FOMC (Federal Open Market Committee) is the Fed’s policy body, and its members, well, their job is to agree on the approach. Who are they? Members of the Board of Governors of the Federal Reserve System including five Reserve Bank presidents. Janet Yellen is a member. The FOMC has eight scheduled meetings per year.
Who is Janet Yellen?
Arguably the most powerful woman in the world given her economic mandate. You can read Janet’s official bio on the US Federal Reserve’s website. As a big fan of Chairman Ben Bernanke, he’ll be missed, but there’s no doubt Janet Yellen will prove a very able, and dovish? successor. Born on 13 August 1946, it’s no surprise that she’s a Leo, and the combination of being born in Brooklyn means she’s a great communicator too! :)
Here’s another take on the taper – John Clarke and Brian Dawe style!
Leanne’s 2012-13 articles on monetary policy:
Leanne Henderson is an Australian financial services executive and PR, marketing and communications specialist and owner of Best of Breed Communications Pty Ltd.