Obama's Fed pick Yellen puts focus on jobs, stability

Reuters

* Yellen would be first woman to head U.S. central bank

* Would provide policy continuity after Bernanke

* Expected to win Senate approval despite some Republicanqualms

By Jeff Mason and Mark Felsenthal

WASHINGTON, Oct 9 (Reuters) - Federal Reserve Vice ChairJanet Yellen, President Barack Obama's pick to lead the U.S.central bank, said on Wednesday that strengthening the economicrecovery and boosting employment would be priorities if she isconfirmed as Fed leader.

Yellen, an advocate of the central bank's aggressive actionsto stimulate economic growth through low interest rates andlarge-scale bond purchases, would replace Fed Chairman BenBernanke, whose second term ends on Jan. 31.

The nomination would put Yellen on course to be the firstwoman to lead the institution and the first to head a centralbank in any Group of Seven industrial nation.

At a White House ceremony where Obama announced hernomination, Yellen said she would promote maximum employment,stable prices, and a sound financial system as the top U.S.central banker and noted there was more to do to ensure peoplewho were out of work could find jobs.

"While we have made progress, we have farther to go. Themandate of the Federal Reserve is to serve all the Americanpeople, and too many Americans still can't find a job and worryhow they'll pay their bills and provide for their families," the67-year-old former professor said.

Yellen will provide continuity with the policies theBernanke-led Fed has pursued, and is likely to move cautiouslyin reining in the extensive monetary stimulus the central bankput in place to shore up the world's largest economy.

Her fealty to the extraordinary policy tactics the Fedemployed in an effort to beat back the 2007-2009 recession andspur faster job growth concerns some Republican who fear themeasures will unleash inflation or fuel asset bubbles.

Despite such opposition, Yellen has strong support fromfellow Democrats and is expected to be confirmed by the Senate.

"Janet is exceptionally well qualified for this role," Obamasaid with a beaming Yellen by his side. "She doesn't have acrystal ball, but what she does have is a keen understandingabout how markets and the economy work, not just in theory butalso in the real world. And she calls it like she sees it."

EASY MONEY, CONTINUITY

The U.S. central bank has held interest rates near zerosince late 2008. It has also roughly quadrupled its balancesheet to about $3.7 trillion through three rounds of massivebond purchases to press down longer-term borrowing costs.

"Yellen's nomination is a clear signal that the highlyaccommodative monetary policy stance will likely remain inplace," wrote Barclays economist Michael Gapen in New York.

While analysts said Yellen's policy approach should besupportive for stock markets that have come to rely on easymoney from the Fed, the market reaction on Wednesday did notprovide a clear read on investor sentiment.

Stocks closed modestly higher, lifted in part by risinghopes that Congress could break a political impasse that has ledto a partial government shutdown and now threatens a possibledefault. The U.S. Treasury has warned it could run out of cashquickly to pay the nation's bills if lawmakers do not raise thegovernment's $16.7 trillion debt ceiling soon.

The Fed is currently buying bonds at a monthly pace of $85billion. It surprised investors in September when it delayed ananticipated reduction in its purchases.

Economists, watching tepid signals on growth and hiring,wonder if a decision to scale back might be delayed until Yellenis in charge next year, but minutes of the Fed's Septembermeeting released on Wednesday showed policymakers were close toacting.

Obama settled on Yellen after his former economic adviserLawrence Summers withdrew from consideration in the face offierce opposition within the president's own Democratic Partythat raised questions about his chances of congressionalconfirmation. Summers would have been expected to pull back theFed's support for the economy more quickly.

With markets jittery about a potential U.S. default, Obamaappeared to want to provide reassurance with his words aboutYellen. He noted her ability to reach consensus with colleagues- something Summers' opponents say he lacked - and her successat predicting the risks of a major recession before it happened.

"Given the urgent economic challenges facing our nation, Iurge the Senate to confirm Janet without delay," Obama said. "Iam absolutely confident that she will be an exceptional chair ofthe Federal Reserve."

"LIBERAL SCHOOL OF THOUGHT"

Yellen's focus on efforts to boost growth has riled someRepublican lawmakers who think the Fed has already pumped toomuch money into the economy.

"Ms. Yellen subscribes to the liberal school of thought thatthe best way to handle our nation's fiscal challenges is tothrow more money at them," said Senator John Cornyn of Texas,the body's No. 2 Republican.

The Republican opposition could lead to a tense hearing whenYellen goes before the Senate Banking Committee, which needs toweigh her nomination before sending it to the full Senate for afinal confirming vote.

In the end, however, Yellen is expected to gain enoughsupport to secure the 60 votes needed to overcome any proceduralhurdles. Democrats control the chamber 54-46.

Senator Susan Collins, a Maine Republican, called Yellen"clearly a very experienced, qualified individual."

"Right now, I am favorably disposed toward her but I do wantto wait until the hearing to see how she answers specificquestions," Collins said.

Yellen could be expected to abide by, if not strengthen, theFed's stated commitment to keep interest rates steady at leastuntil the U.S. jobless rate hits 6.5 percent, as long asinflation does not threaten to pierce 2.5 percent. The joblessrate stood at 7.3 percent in August.

Yellen, who has long argued that the Fed should tolerateslightly higher inflation if that is the cost of fighting highunemployment, has never dissented on a Fed policy decision.

But she also has not shied away from advocating rate risesif she feels the situation calls for it. In 1996, after then-FedChairman Alan Greenspan had repeatedly put off raising rates,she and a colleague went to him to argue that the central bankwas at risk of courting inflation.

"Janet is exceptionally well qualified for the position,with stellar academic credentials and a strong record as aleader and a policymaker," Bernanke said in a statement.

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