By Mark Felsenthal and Jeff Mason
WASHINGTON (Reuters) - President Barack Obama will nominate Federal Reserve Vice Chair Janet Yellen to be the next head of the U.S. central bank on Wednesday, putting her on course to be the first woman to lead the institution in its 100-year history.
Yellen, who would replace Ben Bernanke when his second term as Fed chairman expires on January 31, has been a forceful advocate for aggressive action to stimulate U.S. economic growth through low interest rates and large-scale bond purchases.
If confirmed by the U.S. Senate, she would provide continuity with the policies the Fed has established under Bernanke and would be expected to tread carefully in winding down the extraordinary stimulus the central bank put in place to shore up the world's largest economy.
Her nomination comes during a political stalemate in Washington that has closed the U.S. government and threatened a U.S. default if lawmakers fail to raise the debt ceiling by an October 17 deadline.
"Thank God Yellen will be nominated under the current circumstances. You don't want a change at the central bank right now," said Dan Fuss, a portfolio manager at Loomis Sayles in Boston. "This Yellen news is one uncertainty lifted from already nervous markets."
U.S. stock index futures rose and the dollar slipped against the euro on the news of Yellen's pending nomination.
If she wins the Senate's backing, as expected, she would join the Fed's honor roll along with such household names as Paul Volcker and Alan Greenspan, predecessors as head of an institution that can influence the course of the world economy.
"I believe she'll be confirmed by a wide margin," said Senator Charles Schumer, a Democrat from New York.
Her main challenge will be to steer Fed policy back to a more normal footing and slowly wind down the extensive stimulus measures taken in the five years since the financial crisis.
Obama turned to Yellen, 67, after his former economic adviser Lawrence Summers withdrew from consideration facing fierce opposition from within the president's own Democratic Party, raising questions about his chances of congressional confirmation. The contest between Summers and Yellen played out all summer in a public way not usually associated with the selection of the top U.S. central banker.
Obama is scheduled to make the announcement of his choice at the White House at 3 p.m. EDT (1900 GMT), a White House official said on Tuesday. Bernanke is also expected to attend.
Yellen has enjoyed strong support from Democrats. In an unusual move, 20 Senate Democrats signed a letter earlier this year pressing Obama to turn to the former professor from the University of California at Berkeley.
Her backing on the Republican side of the aisle is much softer. Many Republicans worry the Fed's policy of holding overnight interest rates at zero and the massive bond purchases it has pursued to drive other borrowing costs lower threaten to create asset bubbles and spark an unwanted pickup in inflation.
"I voted against Vice Chairman Yellen's original nomination to the Fed in 2010 because of her dovish views on monetary policy," said Senator Bob Corker of Tennessee in a statement. "We will closely examine her record since that time, but I am not aware of anything that demonstrates her views have changed."
Senator Richard Shelby of Alabama, another Republican, said he has concerns about her "proclivity to print money" and her record as a bank regulator.
Still, Yellen is expected to garner enough support to secure the 60 votes needed to overcome any procedural hurdles in the 100-seat Senate. Democrats control the chamber 54-46.
A respected economist whose research has taken her deep into theories of monetary policy, Yellen has earned a reputation as one of the Fed officials most worried about unemployment and least concerned about inflation.
"With employment so far from its maximum level and with inflation running below the committee's 2 percent objective, I believe it's appropriate for progress in the labor market to take center stage in the conduct of monetary policy," she said in March.
Yellen studied economics at Yale University and taught at Berkeley for more than a decade before her first stint as a Fed board governor from 1994 to 1997, a post she left to head President Bill Clinton's Council of Economic Advisers.
She later served as president of the San Francisco Federal Reserve Bank, where her first-hand view of the overheated real estate market helped her see the dangers of the housing bubble earlier than many of her colleagues.
Yellen has been central to moving the Fed toward more clarity and precision in its communications, an openness which she sees as the key to an effective monetary policy.
She led a panel of officials who rewrote the Fed's rules on communications and helped convince her colleagues to adopt an explicit inflation target for the first time last year.
Her selection bolsters the credibility of promises the Fed has made about the future course of monetary policy that have been a hallmark of its approach ever since it dropped interest rates to zero in 2008.
Specifically, she could be expected to abide by, if not strengthen, the Fed's stated commitment to keep rates steady at least until the U.S. jobless rates hits 6.5 percent, as long as inflation does not threaten to pierce 2.5 percent. The nation's jobless rate stood at 7.3 percent in August.
Yellen, who has long argued that the Fed should tolerate slightly higher inflation if that is the cost of fighting high unemployment, has never dissented on a Fed policy decision.
But she also has not shied away from advocating rate rises if she feels the situation calls for it. In 1996, after then-Fed Chairman Alan Greenspan had repeatedly put off raising rates, she and a colleague went to him to argue that the central bank was at risk of courting inflation.
Her most immediate challenge may be to determine when the Fed should scale back its $85 billion per month bond-buying program. Financial markets had expected the Fed to taper the purchases in September, but it did not and now many economists think it might not move until Bernanke has left office.
Its controversial bond purchases have put the Fed on track to buy some $3 trillion in mortgage and Treasury debt.
The easy money was aimed at digging the U.S. labor market out of the deep hole caused by the 2007-2009 recession.
While it pushed U.S. borrowing costs to record lows and sent U.S. stocks to record highs, the loose policy also fueled resentment in some emerging markets, who had to contend with a flood 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 soon begin to ease up on its monthly purchases sent global financial markets 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.
(Additional reporting by Pedro Nicolaci da Costa, Richard Cowan, and Roberta Rampton in Washington; Ann Saphir in San Francisco; Editing by Krista Hughes and Tim Dobbyn)