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Janet Yellen’s major undertaking

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Janet Yellen’s major undertaking

Janet Yellen will face a major undertaking in February when she inherits the Federal Reserve Chair position from Ben Bernanke. Market participants will look to Yellen to address the central bank’s massive stimulus program, and decide on an exit strategy without disrupting the financial markets.

Economists have shifted their expectations for an asset taper to March 2014 at the earliest. The Fed’s failure to reign in record stimulus in recent months has increased the market’s dependence on quantitative easing. Market participants are now asking themselves whether the US growth engine is merely stimulus in disguise. In 2014 the will-they-won’t-they debate over stimulus could very well shift to whether investors believe the economy can grow without QE.

In reality, the dovish Janet Yellen is unlikely to run out of excuses to delay bond tapering in the first quarter of 2014. At the same time, Yellen probably won’t take a tougher stance on QE than Ben Bernanke, who refused to initiate a tapering campaign even when the markets expected it. Yellen’s real task will be to determine whether the markets can survive in a post-QE world, or whether growth prospects will begin tipping the other way once a stimulus reduction campaign is initiated.

The Fed’s balance sheet has swelled to a record $3.8 trillion. While QE certainly won’t go on forever, it is yet to be determined where the Fed will get the impetus to begin scaling back record stimulus. Will it come from the currency markets, or will the Fed seek to crush the dollar in order to repay its debts?

According to Federal Reserve Bank of Boston President Eric Rosengren, “Start dates [to asset tapering] differing by a quarter or two would generate only relatively small changes in the overall size of the Fed’s balance sheet.” This is one reason “for being patient,” Rosengren would later add.

Others believe the damage brought on by prolonged QE have already taken form; it has created an economy “addicted to stimulus,” as Peter Schiff of Euro Pacific Capital put it.

Janet Yellen is the first woman to ever head the United States Federal Reserve. She became the favourite for the job after former Treasury Secretary Lawrence Summers backed out of the race in September. In February she will become one of the most closely watched policymakers in the world, as she heads the world’s largest economy toward recovery.

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