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US President Barack Obama is set to nominate Fed number two Janet Yellen on Wednesday to run the world’s most influential central bank, providing some relief to markets that would expect her to tread carefully in winding down economic stimulus. The nomination will put Yellen on course to be the first woman to lead the institution in its 100-year history. The advocate for aggressive action to stimulate US economic growth through low interest rates and large-scale bond purchases would replace Ben Bernanke, whose second term as Fed chairman expires on January 31.
If confirmed by the US Senate, which is expected to endorse her, she would provide continuity with the policies the Fed has established under Bernanke. Analysts say she would move cautiously in reining in policies in place to shore up the world's largest economy.
Expectations that the Fed might start to taper its stimulus program have roiled financial markets since May and the central bank shocked investors in September by maintaining its cash injections of $85 billion a month in full.
“Thank God Yellen will be nominated under the current circumstances. You don’t want a change at the central bank right now,” said Dan Fuss, a portfolio manager at Loomis Sayles in Boston. “This Yellen news is one uncertainty lifted from already nervous markets.”
Her nomination would come during a political stalemate in Washington that has closed the US government and threatened a US default if lawmakers fail to raise the $16.7 trillion debt ceiling by an October 17 deadline.
US stock index futures rose and the dollar slipped on the news of Yellen’s pending nomination. The debt standoff is fuelling expectations the Fed may delay any plans to reduce its stimulus for now.
If confirmed, she would join the Fed's honour roll along with such household names as Paul Volcker and Alan Greenspan, predecessors as head of an institution that can influence the course of the world economy.
“I believe she’ll be confirmed by a wide margin,” said Senator Charles Schumer, a Democrat from New York.
Described as a “good egg” by fellow Fed policymaker Richard Fisher and a “very able person” by Japan's Chief Cabinet Secretary Yoshihide Suga, her most immediate challenge may be to determine when the Fed should scale back its bond buying.
After September's surprise decision against tapering, many economists now think the Fed will not move until Bernanke has left office.
Obama turned to Yellen, 67, after his former economic adviser Lawrence Summers withdrew from consideration in the face of fierce opposition from within the president's own Democratic Party, raising questions about his chances of congressional confirmation. The contest between Summers and Yellen played out all summer in a public way not usually associated with the selection of the top US central banker.
Obama is scheduled to announce his nomination at the White House at 3 pm EDT (1900 GMT), a White House official said on Tuesday. Bernanke is expected to attend.
Respected economist
Yellen has enjoyed strong support from Democrats. In an unusual move, 20 Senate Democrats signed a letter earlier this year pressing Obama to turn to the former professor from the University of California at Berkeley.
Her Republican backing is much softer. Many Republicans worry Fed policy of holding overnight interest rates at zero and buying bonds aggressively to drive other borrowing costs lower could lead to asset bubbles and an unwanted pickup in inflation.
“I voted against Vice Chairman Yellen's original nomination to the Fed in 2010 because of her dovish views on monetary policy,” Senator Bob Corker of Tennessee said in a statement. "We will closely examine her record since that time, but I am not aware of anything that demonstrates her views have changed."
Senator Richard Shelby of Alabama, another Republican, said he has concerns about her "proclivity to print money" and her record as a bank regulator.
Still, Yellen is expected to garner enough support to secure the 60 votes needed to overcome any procedural hurdles in the 100-seat Senate. Democrats control the chamber 54-46.
A respected economist whose research has taken her deep into theories of monetary policy, Yellen has earned a reputation as one of the Fed officials most worried about unemployment and least concerned about inflation.
"With employment so far from its maximum level and with inflation running below the committee's 2 per cent objective, I believe it's appropriate for progress in the labour market to take centre stage in the conduct of monetary policy," she said in March.
Yellen studied economics at Yale University and taught at Berkeley for more than a decade before her first stint as a Fed board governor from 1994 to 1997, a post she left to head President Bill Clinton's Council of Economic Advisers.
She later served as president of the San Francisco Federal Reserve Bank, where her first-hand view of the overheated real estate market helped her see the dangers of the housing bubble earlier than many of her colleagues.
As Fed chair, Yellen would arguably be the most powerful woman in the world.
She has been central to moving the Fed toward more clarity and precision in its communications, an openness which she sees as the key to an effective monetary policy.
Yellen led a panel of officials who rewrote the Fed's rules on communications and helped convince her colleagues to adopt an explicit inflation target for the first time last year.
Her selection bolsters the credibility of promises the Fed has made about the future course of monetary policy that have been a hallmark of its approach ever since it dropped interest rates to zero in 2008.
Specifically, she could be expected to abide by, if not strengthen, the Fed's stated commitment to keep rates steady at least until the US jobless rate hits 6.5 per cent, as long as inflation does not threaten to pierce 2.5 per cent. The nation's jobless rate stood at 7.3 per cent in August.
Easy money
Yellen, who has long argued that the Fed should tolerate slightly higher inflation if that is the cost of fighting high unemployment, has never dissented on a Fed policy decision.
But she also has not shied away from advocating rate rises if she feels the situation calls for it. In 1996, after then-Fed Chairman Alan Greenspan had repeatedly put off raising rates, she and a colleague went to him to argue that the central bank was at risk of courting inflation.
Once again, the central bank is facing criticism from some quarters that it is risking inflation. Its controversial bond purchases have put the Fed on track to buy some $3 trillion in mortgage and Treasury debt.
The easy money was aimed at digging the US labour market out of the deep hole caused by the 2007-2009 recession.
While it pushed US borrowing costs to record lows and sent US stocks to record highs, the loose policy also fuelled resentment in some emerging markets, who had to contend with a flood of hot money as investors sought higher returns.
Now, the flood gates are reversing.
The mere mention by Bernanke in May that the Fed could soon begin to ease up on its monthly purchases sent global financial markets reeling and US borrowing costs sharply higher. Currencies and equities in many emerging markets plunged — underscoring the delicate task Yellen would face.
Despite the Fed's aggressive efforts to prop up the economy, growth has been lacklustre and the labour market is still sickly.
FIVE FACTS ABOUT FED CHAIR NOMINEE JANET YELLEN
US President Barack Obama will nominate Federal Reserve Vice-Chair Janet Yellen to take the helm at the US central bank when Ben Bernanke's term expires on January 31. A White House official said on Tuesday the announcement will be made at 3 pm on Wednesday. The nomination must be approved by the US Senate. Following are five key facts about Yellen
1 If confirmed by the Senate, Yellen, 67, would be first woman to head the US Federal Reserve, and the second woman to lead a central bank for a developed nation. The first was Elvira Nabiullina, who was appointed to lead Russia's central bank in June
2 She is seen as a dove on monetary policy, favouring strategies that bring down unemployment even at the risk of driving inflation higher. She has said she does not believe there is often conflict between the two Fed goals. "When the goals conflict and it comes to calling for tough trade-offs, to me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target," she said in 1995
3 She has extensive policymaking experience. Before her appointment as Fed vice chair in 2010, Yellen took part in US monetary policymaking as president of the San Francisco Federal Reserve Bank from 2004-2010, and as a governor on the Fed board from 1994 to 1997. She also chaired President Bill Clinton's Council of Economic Advisors from 1997 to 1999
4 Yellen is a sharp and respected economist. With a PhD from Yale, she has taught economics at University of California, Berkeley, Harvard University and the London School of Economics, and she has published research on topics as disparate as youth gangs, single mothers, optimal monetary policy, wage and price rigidity, and trade
5 Economics saturates her personal life as well. She is married to, and has co-authored a number of papers with, Nobel Prize-winning economist George Akerlof, whom she met in the fall of 1977 when they were both economists at the Fed board. They married the following June and left the Fed to teach at the London School of Economics. Their only child, now a university economics professor, knew he wanted to go into economics by the time he was 13
