Tuesday, June 19, 2018
Business

Yellen faces challenges as Fed trims bond buys

WASHINGTON — 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 longtime Fed official and economist at the University of California at Berkeley, by a 56-26 vote Monday. She begins her four-year term Feb. 1, when Bernanke steps down.

Nominated by President Barack Obama to the top job in October, Yellen, the Fed's vice chair since 2010, 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.

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. The bond purchases have ballooned the Fed's holdings over $4 trillion.

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.

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 U.S. unemployment rates falls to 6.5 percent. Unemployment was 7 percent in November.

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