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

(Continued from page 2)

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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

Emerging markets have some reprieve from the central bank’s Sept. 18 decision to postpone reducing their $85 billion in monthly bond purchases. The MSCI Emerging Markets Index recovered that day to the highest level since May.

“They know a lot more about the implications of their actions for global markets than they did four months ago,” said Webman.

As Fed leader, Yellen would have a role – alongside Governor Daniel Tarullo, who has taken the lead in setting new regulations following the financial crisis – in guiding international discussions about how to make the financial system safer.

In a June 2 speech in Shanghai, Yellen said that regulators need to continue international collaboration by completing the Basel III international bank-capital standards program, resolving “thorny cross-border obstacles” that could thwart regulators from winding down a failing bank with operations in many countries, and increasing scrutiny of so-called shadow banks. Shadow banks are institutions like hedge funds that facilitate the creation of credit outside the regulated banking system.

The Fed also has worked with international counterparts during the crisis and provided as much as $583 billion in liquidity to foreign central banks’ via swap lines. Through these arrangements, the Fed loans dollars to other central banks including the European Central Bank or Bank of England, which they then lend to financial institutions in their regions.

Her approach may be very similar to Bernanke’s, said Bryson of Wells Fargo, when it comes to using the Fed’s balance sheet in an international crisis.

“I would not expect her to be radically different,” he said. “If Bernanke thought extending swap lines or increasing swap lines would be appropriate, I think 99 out of 100 times Janet Yellen would say the same things as well.”

With assistance from Simon Kennedy in London and Sandrine Rastello in Washington.

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