Obama to choose Yellen for top Fed job, markets relieved

Reuters

* Yellen would be first woman to head the Fed

* Monetary dove would provide policy continuity

* Seen winning Senate backing despite some Republican qualms

* Nomination seen as a relief for markets

By Mark Felsenthal and Jeff Mason

WASHINGTON, Oct 8 (Reuters) - U.S. President Barack Obamawill nominate Fed number two Janet Yellen on Wednesday to runthe world's most influential central bank, providing some reliefto markets that would expect her to tread carefully in windingdown economic stimulus.

The nomination will put Yellen on course to be the firstwoman to lead the institution in its 100-year history. Theadvocate for aggressive action to stimulate U.S. economic growththrough low interest rates and large-scale bond purchases wouldreplace Ben Bernanke, whose second term as Fed chairman expireson Jan. 31.

If confirmed by the U.S. Senate, which is expected toendorse her, she would provide continuity with the policies theFed has established under Bernanke. Analysts say she would movecautiously in reining in policies in place to shore up theworld's largest economy.

Expectations that the Fed might start to taper its stimulusprogram have roiled financial markets since May and the centralbank shocked investors in September by maintaining its cashinjections of $85 billion a month in full.

"Thank God Yellen will be nominated under the currentcircumstances. You don't want a change at the central bank rightnow," said Dan Fuss, a portfolio manager at Loomis Sayles inBoston. "This Yellen news is one uncertainty lifted from alreadynervous markets."

Her nomination would come during a political stalemate inWashington that has closed the U.S. government and threatened aU.S. default if lawmakers fail to raise the $16.7 trillion debtceiling by an Oct. 17 deadline.

U.S. stock index futures rose and the dollar slipped on thenews of Yellen's pending nomination. The debt standoff isfueling expectations the Fed may delay any plans to reduce itsstimulus for now.

If confirmed, she would join the Fed's honor roll along withsuch household names as Paul Volcker and Alan Greenspan,predecessors as head of an institution that can influence thecourse of the world economy.

"I believe she'll be confirmed by a wide margin," saidSenator Charles Schumer, a Democrat from New York.

Described as a "good egg" by fellow Fed policymaker RichardFisher and a "very able person" by Japan's Chief CabinetSecretary Yoshihide Suga, her most immediate challenge may be todetermine when the Fed should scale back its bond buying.

After September's surprise decision against tapering, manyeconomists now think the Fed will not move until Bernanke hasleft office.

Obama turned to Yellen, 67, after his former economicadviser Lawrence Summers withdrew from consideration in the faceof fierce opposition from within the president's own DemocraticParty, raising questions about his chances of congressionalconfirmation. The contest between Summers and Yellen played outall summer in a public way not usually associated with theselection of the top U.S. central banker.

Obama is scheduled to announce his nomination at the WhiteHouse at 3 p.m. EDT (1900 GMT), a White House official said onTuesday. Bernanke is expected to attend.

RESPECTED ECONOMIST

Yellen has enjoyed strong support from Democrats. In anunusual move, 20 Senate Democrats signed a letter earlier thisyear pressing Obama to turn to the former professor from theUniversity of California at Berkeley.

Her Republican backing is much softer. Many Republicansworry Fed policy of holding overnight interest rates at zero andbuying bonds aggressively to drive other borrowing costs lowercould lead to asset bubbles and an unwanted pickup in inflation.

"I voted against Vice Chairman Yellen's original nominationto the Fed in 2010 because of her dovish views on monetarypolicy," Senator Bob Corker of Tennessee said in a statement."We will closely examine her record since that time, but I amnot aware of anything that demonstrates her views have changed."

Senator Richard Shelby of Alabama, another Republican, saidhe has concerns about her "proclivity to print money" and herrecord as a bank regulator.

Still, Yellen is expected to garner enough support to securethe 60 votes needed to overcome any procedural hurdles in the100-seat Senate. Democrats control the chamber 54-46.

A respected economist whose research has taken her deep intotheories of monetary policy, Yellen has earned a reputation asone of the Fed officials most worried about unemployment andleast concerned about inflation.

"With employment so far from its maximum level and withinflation running below the committee's 2 percent objective, Ibelieve it's appropriate for progress in the labor market totake center stage in the conduct of monetary policy," she saidin March.

Yellen studied economics at Yale University and taught atBerkeley for more than a decade before her first stint as a Fedboard governor from 1994 to 1997, a post she left to headPresident Bill Clinton's Council of Economic Advisers.

She later served as president of the San Francisco FederalReserve Bank, where her first-hand view of the overheated realestate market helped her see the dangers of the housing bubbleearlier than many of her colleagues.

As Fed chair, Yellen would arguably be the most powerfulwoman in the world.

She has been central to moving the Fed toward more clarityand precision in its communications, an openness which she seesas the key to an effective monetary policy.

Yellen led a panel of officials who rewrote the Fed's ruleson communications and helped convince her colleagues to adopt anexplicit inflation target for the first time last year.

Her selection bolsters the credibility of promises the Fedhas made about the future course of monetary policy that havebeen a hallmark of its approach ever since it dropped interestrates to zero in 2008.

Specifically, she could be expected to abide by, if notstrengthen, the Fed's stated commitment to keep rates steady atleast until the U.S. jobless rate hits 6.5 percent, as long asinflation does not threaten to pierce 2.5 percent. The nation'sjobless rate stood at 7.3 percent in August.

EASY MONEY

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.

Once again, the central bank is facing criticism from somequarters that it is risking inflation. Its controversial bondpurchases have put the Fed on track to buy some $3 trillion inmortgage and Treasury debt.

The easy money was aimed at digging the U.S. labor marketout of the deep hole caused by the 2007-2009 recession.

While it pushed U.S. borrowing costs to record lows and sentU.S. stocks to record highs, the loose policy also fueledresentment in some emerging markets, who had to contend with aflood 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 soonbegin to ease up on its monthly purchases sent global financialmarkets reeling and U.S. 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 lackluster and the labor market is still sickly.

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