October 11, 2013

When Janet Yellen speaks as Fed chair, the world will listen

If she wins Senate approval, Yellen will be able to dispense an unlimited supply of liquidity if the world stumbles into another financial crisis.

By Joshua Zumbrun
Bloomberg News

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President Barack Obama listens as Janet Yellen, vice chair of the board of governors of the Federal Reserve System, speaks at the White House in Washington on Wednesday, when the president announced he is nominating Yellen to chair the Federal Reserve, succeeding Ben Bernanke.

The Associated Press

Yellen, 67, is familiar to many central bankers overseas. She has been a regular attendee at the Jackson Hole symposium, which draws policy makers from around the world. As San Francisco Fed president from 2004 until 2010, she also has presided over an annual conference on economies of the Pacific Basin.

Her nomination for the top Fed post came as finance officials from around the world gathered in Washington for annual meetings of the IMF and World Bank.

“I have a lot of respect for her,” said Felipe Larrain, Chile’s finance minister, in an interview on Wednesday in Washington. “She’s highly respected and, for me, she means continuity from Bernanke.”

Among her international admirers is Christine Lagarde, the managing director of the IMF who told reporters Aug. 1 that Yellen is “my friend,” and she “is a very competent woman.”

Lagarde told not-for-profit organizations gathered at the World Bank on Thursday that she wanted to “celebrate there’s a woman who’s been nominated to head the Fed.”

“I trust Janet to be a fantastic communicator,” Lagarde said. “She’s on message, she’s very rigorous, very strict and I know when she has to communicate something, there will be no misunderstanding and no room for fuzzy messages. Not that there has been any in the past.”

During her tenure as Fed vice chairman, Yellen has maintained a busy international travel schedule, flying to meetings of regulators and central bankers in London, Paris, Zurich, Basel, Bern, Helsinki, Mexico City, Tokyo and Shanghai.

“She’s been off and on in the official sector now for almost 20 years and before that a very high-profile academic, so I think she knows on a personal basis the key players,” said Nathan Sheets, the former head of the Fed’s international- finance division and now global head of international economics at Citigroup in New York. “Yellen is much more a known commodity amongst international officials than Bernanke was when he was appointed.”

Some emerging market central bankers said that Yellen’s nomination may give their economies a reprieve from the risk of an immediate reduction of stimulus.

“I expect her to consider well the ripple effects on other countries” from policy decisions such as altering the Fed’s bond-buying program, Choi Hee Nam, director general of the South Korea finance ministry’s international finance bureau, said by phone from Sejong Oct. 9.

Koichi Hamada, an adviser to Japanese Prime Minister Shinzo Abe, said Yellen is “more likely to seek a way to make an economic recovery certain by keeping policy accommodative.” If prospects of an exit weaken, that may put pressure on the yen to rise, risking harm to Japan and boosting the need for the Bank of Japan to act, said Hamada, who doesn’t speak for the government.

Unconventional monetary policy like the Fed’s has “undesirable side effects” in emerging markets even while helping stabilize the global economy, Carstens said in his speech in August.

“What would have the most impact right now would be to have a much better, clearer implementation of the tapering,” Carstens told central bankers. “If you keep pampering the markets, the inflow of capital can be such that more stability risks can be accumulated in emerging-market economies.”

On May 22, Bernanke told Congress that the Fed could begin reducing bond purchases in the “next few meetings” and over the next month emerging-market stocks lost more than $1 trillion in value.

“They should probably have been more aware of how their announcements would shake up markets in general, and emerging markets as part of that,” said Jerry Webman, the chief economist at OppenheimerFunds in New York, with $209 billion in assets under management. “I’m sure she has all the chops to know about this now. She was sitting at the No. 2 position in May.”

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