U.S: Yellen faces challenges as Fed trims bond buys

WASHINGTON
(AP) — Janet
Yellen will take the helm of a Federal Reserve
facing a significantly different economic landscape
from the one that dominated Ben Bernanke's
tenure as chairman, confronting her with different
decisions as well.
Bernanke's eight years leading the Fed were
largely consumed with the Great Recession and his
efforts to cure it by pushing down interest rates
and pumping cash into the economy. Many
economists think Yellen's big challenge will be
deciding how to ease off some of those very
policies, which Bernanke took with Yellen's support.
"Circumstances may demand more rapid
tightening than people are expecting," said Bill
Cheney, chief economist for John Hancock Financial
Services, who envisions a growing economy this
year. He contrasted that with Bernanke, who he
said had to decide "when to step on the gas pedal
and how hard" as the economy recovered weakly
from the recession.
The Senate confirmed Yellen, a long-time Fed
official and economist at the University of California
at Berkeley, by a 56-26 vote Monday. Supporting
her were all 45 voting Democrats and 11
Republicans, while all opposing votes came from
the GOP. Many senators missed the vote because
frigid weather canceled numerous airline flights.
Yellen begins her four-year term Feb. 1, when
Bernanke steps down. She has been Fed vice chair
since 2010.
Nominated by President Barack Obama to the top
job in October, Yellen comes to the post after a
career in which she has focused in part on
unemployment and its causes. Obama and
congressional Democrats lauded her concerns for
workers Monday.
In a written statement, Obama said Yellen's
approval means "the American people will have a
fierce champion who understands that the ultimate
goal of economic and financial policymaking is to
improve the lives, jobs and standard of living of
American workers and their families."
Many Republicans were less enthusiastic. Sen.
Charles Grassley, R-Iowa, warned that a
continuation of the Fed's easy money policies
"risks fueling an economic bubble and even hyper-
inflation," which he said could cause "real and
lasting damage to our economy."
House Financial Services Committee Chairman Jeb
Hensarling, R-Texas, announced that he will hold
hearings on the Fed's bond buying program and on
the "potential unintended consequences" of the
Volcker rule. That rule, approved by the Fed and
other agencies, is aimed at preventing many large
banks from trading for their own profit in hopes of
preventing practices that helped lead to the 2008
financial meltdown.
Lobbyists for the banking and financial services
sectors issued statements pledging to work with
Yellen. Both industries have led a fight to water
down restrictions imposed by Obama's 2010 law
overhauling how the nation's financial system is
regulated.
The Fed announced in December that the labor
market has improved enough that it will begin
reducing its $85 billion in monthly bond purchases,
starting with a $10 billion reduction this month. It
has pushed that money into the economy to try
keeping long-term interest rates low.
But Yellen will face questions about how to manage
that process. Moving too fast could spook financial
markets and shove interest rates higher, while
withdrawing the bonds too slowly could risk
creating bubbles — that might burst — in real
estate, the stock market or other assets.
The bond purchases have ballooned the Fed's
holdings over $4 trillion. That leaves Yellen with
decisions about how to wind down the central
bank's balance sheet to a smaller, more normal
level without destabilizing financial markets used
to the huge cash infusions.
Yellen also will have to decide when and how to
ease off short-term interest rates, which the Fed
has kept near zero since December 2008. To assure
investors that those rates won't precipitously rise,
the Fed has repeatedly issued statements saying
that policy will continue.
Last month, the Fed said the low rates will continue
"well past" when the unemployment rates falls to
6.5 percent. Unemployment was 7 percent in
November and many economists think the low
interest rates will last until late 2015.
Yellen will also guide the Fed at a time when some
Republicans say the central bank needs to be more
accountable to Congress. Hensarling has already
said his committee will spend a year reviewing Fed
operations.
Last week, Bernanke voiced concerns about
legislation giving the Government Accountability
Office, Congress' auditing arm, more power to
examine how the Fed makes interest rate
decisions. Bernanke said such legislation would
make it harder to assure markets that its decisions
aren't influenced by political pressure.
Sent From David Aniemeka