In the midst of a political firestorm, President Obama has nominated 67-year-old Janet Yellen to succeed Ben Bernanke as chairman of the Federal Reserve. While the timing of the announcement caught Wall Street off guard, his chosen candidate did not, as Yellen has been the front-runner for the job for months. In choosing Yellen, President Obama has not only chosen the favorite, the first woman and someone who is touted as being the most qualified individual ever picked to lead the central bank, but he's also signed on to a way of life; the easy money, accommodative, dovish ways of Ben Bernanke and his heir apparent.
As my co-host Jeff Macke and I discuss in the attached video, Yellen will not only carry on the Bernanke legacy, she might even embellish it to make it her own. If Bernanke's waning days have been dominated by the question of if and when to taper, or scale back on, a risky bond buying program that aims to keep rates artificially low, Yellen is expected to embrace that program and then some, as she falls into the overly cautious camp of not wanting to do anything that would disrupt the recovery in the early days of her new job.
Remember last summer when a mere mention of the Fed possibly reining in its $85 billion a month bond buying program sent 10-year treasury yields (^TNX) and mortgage rates soaring, and in turn, threatened the economy and the nascent recovery in housing? Janet Yellen does and, not surprisingly, she was amongst the majority at the Fed who quickly backed off that plan, saying the data just wasn't there yet to justify winding down the program. Rates immediately came back down and stocks rallied to new highs on the news.
The problem is that no sooner did markets digest that rate-reprieve and the government went into shutdown mode; a development that not only threatens the economy but also benches its data-making machine in the form of furloughed federal workers. Together, these two issues have made it even more likely that Yellen (assuming the Senate confirms her) won't be in a position to tighten or raise rates for many, many months.
Therefore, under a Yellen-led Fed, interest rates are even more likely to be kept artificially low for even longer. In turn, that would keep mortgage rates in check which not only makes buying a home cheaper and easier for individuals, this increased demand supports the overall recovery in housing. Specifically, Bankrate.com says the average rate on a 30-year fixed mortgage has fallen four weeks in a row now, to 4.39% from 4.70%, since the Fed's meeting last month.
At the same time, the benchmark 10-year Treasury yield is down too, and has gone from 3% on September 5th to about 2.7% today; a phenomenon that drives underlying rates lower on many other types of loans and lines of credit too. So whether it's huge companies looking to finance new equipment, or your average household making payments on a car or credit card, cheaper borrowing costs stimulate demand.
While low rates do make it less rewarding for savers to keep money in the bank, they also tend to nudge investors to seek better returns elsewhere, which in recent years has seen money moving into the stock market.
Critics will say the wanton growth of the Fed's balance sheet, which has quadrupled to over $4 trillion dollars in the last five years, is a treacherous experiment that will ultimately spawn inflation and economic ruin. So far, that has not happened but it is something the current and incoming Fed chiefs say they can contain, if and when the problem arises.
The wild card in all of this is Congress itself, and whether or not lawmakers will be able to bridge their differences before any serious damage has been done to the markets, the economy, or both. This variable alone could be the defining factor in how aggressive or dovish, the incoming Fed chief is likely to behave. While Janet Yellen is a known entity that is seen as a safe and predictable choice, ultimately her future policy actions will be largely reliant on the state of the economy.
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