Factbox: Policy challenges looming for Yellen as likely next Fed chair


(Reuters) - President Barack Obama will nominate Fed Vice Chair Janet Yellen on Wednesday to succeed Ben Bernanke as leader of the U.S. Federal Reserve, putting her atop the world's most influential central bank as it attempts to finally move on from an era of economic crisis.

If Yellen is confirmed by the Senate, as expected, she will face a series of delicate policy challenges in the months and years ahead, starting with how quickly to wind down the Fed's aggressive bond-buying campaign.

Here are the main policy challenges on the horizon:


After three rounds of quantitative easing, or QE, the Fed's balance sheet has swelled to about $3.7 trillion, a record level and far higher than the approximately $1 trillion the Fed carries in more normal times. Some fear the haul of Treasuries, mortgage-backed securities and other bonds could stoke inflation in the years ahead, and potentially cause hard-to-detect market disruptions and asset bubbles.

While it continues to buy $85 billion in bonds per month to encourage investment and growth, the Fed wants to begin reducing the program. Bernanke said in June the Fed expects to taper the purchases this year and halt them altogether by mid-2014, although he declined to confirm that timetable in September.

The trick for Yellen would be winding down the program without rattling financial markets or disrupting an economic recovery that, in the past few years, has proven quite vulnerable to shocks both domestic and foreign.


The Fed's main policy tool, the federal funds rate, has been near zero since the darkest days of the financial crisis in late 2008. The first policy tightening is not likely to come until 2015, based on Fed predictions, though that could change if levels of inflation or unemployment veer away from expectations.

The central bank has said it will keep rates where they are at least until unemployment drops to 6.5 percent from 7.3 percent in August, as long as inflation does not threaten to top 2.5 percent. But if investors start to expect rates will rise earlier than the Fed intends, higher across-the-board borrowing costs could trip up the economy.

Despite the forecasts and the jobless rate threshold, financial markets at times have questioned the credibility of the Fed's forward guidance on policy.

Yellen will now have to take the lead role in guiding market expectations.


Right now, everyone agrees that unemployment is too high and inflation too low, so the Fed has faced a relatively easy decision on keeping monetary policy very loose.

If inflation weakens before hiring picks up more convincingly, policymakers will face the difficult question of whether to ramp up their already extraordinary stimulus to stave off deflation and boost the labor market. But if inflation, perks up and threatens to reach the Fed's 2.5 percent upper threshold, policymakers might be forced to tighten policy despite higher-than-desired joblessness.

Possibly complicating things for the new chairman, the Fed will for the first time be able to also raise the interest rate it pays banks on their excess reserves held at the central bank. Raising this rate should stem what could be a flood of bank reserves into the marketplace, curbing a run-up in inflation - but it is an untested tool.


Further along the horizon, the central bank will have to shrink its balance sheet down to a more normal size, whether through asset sales or simply by letting the bonds mature. The quicker it reduces holdings, the tighter monetary policy will become and the greater the pressure on markets to absorb the assets.

But perhaps most sensitive for the Fed, it could be left with losses that would lead to a temporary end to its regular remittances to the U.S. Treasury, potentially opening the door to criticism from politicians who want to rein in the central bank's prized independence.

It will be up to the new chairman to safeguard the Fed's independence.

(Reporting by Jonathan Spicer; Editing by Grant McCool)


View Comments (0)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • 1 Tip To Lose Belly Fat

    It's Hollywood's Hottest Diet And Gets Rid Of Stubborn Fat Areas Like Nothing Else.

  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • Only 4 states will see cuts to food stamps

    Cuts to the nation's food stamp program enacted this year are only affecting four states, far from the sweeping overhaul that Republicans had pushed, an Associated Press review has found. As a result, it's unclear whether the law will realize the estimated $8.6 billion in savings over 10 years that…

    Associated Press
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

  • Best Womens Wrinkle Creams 2014

    Mom reveals simple wrinkle solution that has researchers very excited. Try this free solution today to look and feel years younger.

  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

  • Gold loses luster on Fed; Barclays cuts forecast

    Barclays cuts gold forecasts, sees increasingly bearish backdrop Bloomberg MA MB MC MD ME SAN FRANCISCO (MarketWatch) — Gold prices dipped Wednesday on concerns about a stronger dollar ahead of the Federal Reserve policy statement and in response to Barclays lowering its gold forecast.

  • Play

    What the Fed Meeting Means for Bonds

    Janet Yellen & Co. are expected to hint at their timetable for raising interest rates. Here's how investors should prepare ahead of the meeting.

    WSJ Live
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • Tired of Living Paycheck to Paycheck?

    New website reveals how to save $1,000's when you're living paycheck to paycheck. See exactly how.

    AdChoices Media ForceSponsored
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • Fed renews zero rate pledge, but hints at steeper rate hike path

    The Federal Reserve on Wednesday renewed its pledge to keep interest rates near zero for a "considerable time," but also indicated it could raise borrowing costs faster than expected when it starts moving. In a statement after a two-day meeting of its policy-setting Federal Open Market Committee,…

  • Boeing may have outfoxed Musk, but it could have bigger problems

    Elon Musk is arguably one of the greatest entrepreneurial minds of the 21st Century, but he was outsized an old school aerospace giant. Boeing won the bulk of NASA’s contract for a space taxi.  One of the other companies vying for the deal is SpaceX, the company headed by Tesla’s Musk, will get a…

    Talking Numbers
  • Romney-Sized IRAs Scrutinized as Government Studies Taxes

    The preliminary report attaches data to an issue that drew attention during the 2012 presidential campaign, when Republican nominee Mitt Romney reported an IRA worth $20 million to $102 million. Senate Finance Committee Chairman Ron Wyden said many of these "massive" accounts come from deals…

  • The Government Keeps Helping People Buy Failing Cold Stone Creamerys

    Would you loan someone money to buy a Cold Stone Creamery franchise if you knew that more than a quarter of those loans default? Over the last decade, franchisees in the Cold Stone Creamery ice cream chain defaulted on 29 percent of working-capital loans backed by the government, costing taxpayers…

  • Russian billionaire placed under house arrest

    A billionaire Russian tycoon was placed under house arrest Tuesday in a money-laundering case that has drawn comparisons with a government crackdown on Russia's Yukos oil company more than a decade ago. The Investigative Committee, Russia's top investigative agency, said that Vladimir Yevtushenkov,…

    Associated Press
  • Anyone With $40 Could Become A Millionaire

    1 simple Warren Buffett quote explains the key investing strategy that could create unimaginable long term wealth for you and your family.

    AdChoicesThe Motley FoolSponsored
  • Facebook Is Hiding Important Information From Investors

    Facebook Is Hiding Important Information From Investors Facebook.com/sheryl On July 23, when Facebook reported its earnings for the second quarter, the company stunned everyone. Revenues were $2.68 billion, up 67% from the same quarter during the year

    Business Insider