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New Fed Chair Could Mean Interest Rates Near Zero Until 2017

Daily Ticker

Janet Yellen's Senate hearing to be the next Federal Reserve chair is today, but her confirmation is far from certain.

Republican Senators Rand Paul and Lindsey Graham have threatened to delay the confirmation process and put Yellen’s nomination on hold (Paul wants a vote on his Fed “Transparency Act"; Graham wants more hearings related to the September 2012 attack on the U.S. consulate in Benghazi).

Related: Rand Paul “Absurd” to Hold Up Yellen's Nomination, Kotok Says; Stockman Praises Senator

The White House’s top economic advisor tells The Daily Ticker he’s not concerned about these threats.

“I just do not see any scenario in which Janet Yellen is not confirmed, based on her very strong credentials, background, [and] independent thinking,” Gene Sperling, director of the White House National Economic Council, tells us in the accompanying video.

As for those credentials, Yellen is the Fed’s current vice chair. Formerly, she was president of the San Francisco Fed.

If she’s confirmed to replace Ben Bernanke, she’ll inherit the Fed’s nearly $4 trillion balance sheet, not to mention the central bank’s current $85 billion dollar per month bond-buying program and its zero interest rate policy, adopted in late-2008.

So what can we expect from a Yellen Fed chief?

“By her voting record and speeches, she’s more dovish than Bernanke,” Gary Shilling, president of A. Gary Shilling & Co, tells us. “So you had the Greenspan put, you had the Bernanke put, now you’ll probably have the Yellen put.”

Related: Rickards on Fed & Yellen: Here Comes the 'Helicopter Money

But Michelle Girard, chief U.S. economist at RBS, sees Yellen switching things up form Bernanke. Yellen may focus less on asset purchases, or QE, and try to boost the economy by extending the Fed’s zero interest rate policy (which impacts short-term rates).

Related: “No Urgency” at the Fed to Taper Despite 'Strong' Jobs, GDP Data: Girard

“Her whole focus has been on the forward guidance – the communication that the Fed gives about the outlook for interest rates,” says Girard. “And a lot of her work suggests rates may not to be raised until 2016 maybe 2017.”

According to Bloomberg, most Fed policymakers expect to see the first interest rate hike occur in 2015. The federal funds target rate will be 2% at the end of 2016 according to the median estimate of policymakers surveyed.

The Fed has said it will keep the target rate near zero until the unemployment rate is above 6.5% and inflation is in check.

Shilling also expects the Fed to keep interest rates near zero until the unemployment rate falls below 6.5%. He notes that the decline in the labor force participation rate has made the unemployment rate appear lower than it really is.

In prepared remarks before her confirmation hearing Yellen said that "important work lies ahead" for the Fed in "promoting a strong and stable" financial system:

"I am committed to using the Fed's supervisory and regulatory role to reduce the threat of another financial crisis. I believe that capital and liquidity rules and strong supervision are important tools for addressing the problem of financial institutions that are regarded as "too big to fail." In writing new rules, however, the Fed should continue to limit the regulatory burden for community banks and smaller institutions, taking into account their distinct role and contributions. Overall, the Federal Reserve has sharpened its focus on financial stability and is taking that goal into consideration when carrying out its responsibilities for monetary policy. I support these developments and pledge, if confirmed, to continue them."

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