Federal Reserve gears down on stimulus during historic leadership swap
Jacquelyn Martin, ASSOCIATED PRESS
Interest rates should remain low for some time, even as the Fed slowly dials back the aggressive stimulus policies that have juiced the markets and pumped up home purchases since 2009.
As Janet Yellen shatters the glass ceiling by becoming the first woman to lead the world’s most powerful bank, the word on the street is “continuity.”
Yellen was sworn in Monday as the new chairman of the Federal Reserve Board. There will be little daylight between the Ben Bernake and Yellen regimes, said Greg McBride, chief financial analyst at Bankrate.com.
And in the long term, he said, Yellen is thought to be, if anything, more freewheeling. “From a policy standpoint, she is more dovish, even more inclined to err on the side of more stimulus for longer than Bernake,” McBride said.
In the official Fed statement last Wednesday, the Fed announced that in February it would reduce its stimulus asset purchases by $10 billion a month, down to $65 billion from $75. It’s a signal of cautious confidence in the economy, but not outright enthusiasm.
“The Fed appears to think the economy is steadily getting better and doesn’t need as much help,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “But it is a long way from saying the economy is good.”
The Fed has reassured investors by clearly signaling that it intends to do everything it can to get the economy moving and that interest rates near zero for a long time, Wessel said. Most observers thus expect a smooth transition from retiring chair Ben Bernake to incoming Yellen, McBride said.
In its statement last Wednesday, the Fed bent over backwards to reassure investors that interest rates would continue to hover at historic lows. Investors are watching carefully.
Twice in recent months, the stock market was spooked when the Fed began to pull back stimulus policies, said John Makin, an economist at the American Enterprise Institute. But each time the Fed pulled back from the threat, Makin said, and this time, the market was more prepared, more confident in the underlying economy and in the Fed’s commitment to go slow.
Largely absent in last week’s coverage of Yellen’s imminent occupation of the Fed’s corner office was the historic nature of her appointment.
Yellen’s gender was of greater interest last fall, Wessel said, when former Harvard president Larry Summers was considered a front runner, but many argued the nod should go to an equally qualified Yellen. But after Summers withdrew his name, Yellen became the clear favorite, and focus shifted to the Fed’s policies and the state of the economy, rather than the historic breakthrough for women.
“We are reaching a point where you don’t have to say in every story that she is the first woman,” Wessel said. “It’s important, and it’s symbolic, but it’s been overshadowed by discussion about what is she going to actually do.”
“I think the significance of the fed chair has nothing to do with gender,” said Bankrate.com’s Greg McBride. “She’s now the single most influential person to the pocketbooks of every day Americans. Male or female is beside the point.”
A U.C. Berkeley economics professor, Yellen first began working with the Fed in 1994. She served for two and one-half years heading President Clinton’s Council of Economic Advisers, from 1997 to 1999, and she headed the San Francisco Fed for six years before becoming vice chair of the Federal Reserve under Bernake in 2010.
Yellen was widely viewed as the heir apparent, both because of her strong pedigree and her close philosophical ties to the current leadership.
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