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Janet Yellen is about to face the biggest test of her life


By all accounts, Janet Yellen has always been an excellent, if not eager, student and still is today. She has literally spent her entire adult life hobnobbing, philosophising, even married to, the brightest minds in economics. To be sure, the incoming Fed chief (who could be confirmed as early as today) has both taken and given all sorts of tests over the course of her 50 year academic career, yet none like the one she is about to face.

“We don’t know what that test will be (or whether) it will occur very early in her career, but the markets do have a way of testing leadership,“ says Hank Smith, chief investment officer at Haverford, to my colleague Lauren Lyster in the attached video.

Whether its Paul Volcker facing runaway inflation and the effects of double digit interest rates, a freshly minted Alan Greenspan facing the massive stock market crash of 1987, or Ben Bernanke contending with the worst financial crisis and recession in 80 years, Smith says history has shown that virtually all leaders of the central bank face serious, unforeseen challenges.

Related: Why Janet Yellen Is the Right Person to Lead the Taper

As for Yellen, one possible scenario she might face could be the loss of control of interest rates or the so-called yield curve in what Smith describes as not so much the degree of the increase but an unexpectedly quick pace of it.

The unwinding of quantitative easing or “Q-E” will also present chairwoman Yellen with unprecedented challenges, but here Smith takes almost on optimistic, if not contrarian stance.

“Everyone, from our point of view, thinks the Fed is going to get it wrong,” he says. “So I actually think they might surprise the investment community and get this more right than wrong,” adding that any bet against the Fed for the past five years has been a losing one.

As he sees it, an orderly and continued tapering of the Fed’s bond buying program by the $10 billion month currently planned is already priced into the market. However, if economic conditions were to cause a Yellen-lead Fed to either accelerate the monthly wind-down, scale it back, or pause it altogether, Smith says that is not priced-into the market.

Related: What Janet Yellen Means for Your Wallet

Washington politics could also prove to be a challenge for Yellen, as an exponential increase in her direct dealings with various lawmakers could be challenging for this life-long democrat and dove. Similarly, international relations will also pit Yellen against foes and forces that’s she never had to deal with before.

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