February 17, 2014
On February 3, 2014, Janet Yellen took over the reigns from Ben Bernanke as Chair of the Federal Reserve. Though the change had been in the making for over a year, the shift itself felt sudden nonetheless. Not to get too sentimental, but Bernanke was one of the last holdovers from the Great Recession of 2008; first George W. Bush and Henry Paulson left office, then Timothy Geithner, and now Ben Bernanke, the king himself. It felt like a piece of my childhood dying.
And in many ways, that’s the point. Yellen’s appointment signals a shift in the Fed’s role in the United States economy; we have officially exited crisis mode, slowly moving away from unconventional monetary policy towards a more stable and subdued Federal Reserve.
Janet Yellen is as close to a Fed-lifer as you can get, having joined the Federal Reserve Board of Governor’s in 1978. She served as Vice Chair under Bernanke from 2010 on, and knows the inner-workings of the Fed better than anyone else. Despite her long career and the general calm in U.S. markets, Yellen’s tenure as Fed Chair has already faced many questions, the most obvious of course being the future of Quantitative Easing.
As Tyler Epstein commented on last month, the Fed’s decision to taper has been closely followed for months, and with good reason. Turning off the easy money tap has huge consequences for economies and markets across the world. Yellen has indicated that she will continue to taper, but economic stability remains the Fed’s goal.
From the few opportunities Yellen has had thus far, it appears that she will continue to be a “dove,” prioritizing economic growth over inflation control (as the “hawks” do). As the U.S. economic recovery slowly chugs forward, Yellen will likely slow the Fed’s bond buying program and return the Fed to its more behind-the-scenes role. The latest debt ceiling, healthcare, unemployment, and minimum wage debates will likely grab most economic headlines from here on out, and in my opinion, Janet Yellen is pretty fond of that idea. As long as Main Street lays off outrageous mortgages and Wall Street lays off outrageous leverage, things should quiet down.
January 19, 2014
Fed Decision to Taper
The Federal Open Market Committee (FOMC) announced a $10 billion reduction of QE3 on December 18, 2013. QE3 began with monthly asset purchases of $40 billion in mortgage bonds and added $45 billion in Treasury purchases to the stimulus program in December 2012. Over the course of QE3, The Fed’s balance sheet has risen to $4.01 trillion from $2.82 trillion. Vice Chairman Janet Yellen will step in as Chairman of the Federal Reserve on January 31 to replace Ben Bernanke after eight years as Chairman.
In September 2012, Federal Reserve Chairman Ben Bernanke announced that if the economy improves as the Federal Reserve forecasts, the FOMC may continue to taper the stimulus program by approximately $10 billion per meeting, which would conclude the program in December 2014. While announcing that the Fed will begin to slow asset purchases, Bernanke also committed to keep the target interest rate near zero, which was initially lowered in December 2008. The record of the FOMC’s last meeting stated: “A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue,” indicating that the economy is not experiencing as strong gains.
The amount that the Federal Reserve slows down the stimulus program depends on how the economy continues to progress with respect to inflation, job growth, housing and manufacturing. Prior to the announcement on December 18, it was released that unemployment in November continued to fall to a five-year low of 7 percent, short of the Fed’s 6.5 percent target rate. Inflation in November was reported at 0.9 percent, which remains significantly below the 2 percent goal. The FOMC will reconvene on January 28-29 to consider next steps in tapering.