Washington: When the Federal Reserve announced the end of its landmark bond buying programme, it also signalled the start of something else: The Janet Yellen era.
Officially, Yellen has been Fed chair since February. But the phase-out of the bond-buying stimulus programme Yellen inherited from her predecessor, Ben Bernanke, truly marks her inauguration. She can now begin to fully stamp her influence on the central bank.
“Janet Yellen’s ability to place her mark on the nation’s monetary policy is only now opening up,” said Scott Anderson, chief economist at Bank of the West. “It will largely be Yellen” who guides rates back to their historic averages from near-zero levels.
Yellen will also preside over the unwinding of the Fed’s vast portfolio of bonds, which its purchases have magnified to more than $4 trillion (Dh14.6 trillion), a record high. The bond buying had been designed to keep long-term loan rates low.
Bernanke’s tenure at the Fed was focused on bolstering the financial system and rescuing the economy. Yellen’s will require a delicate balancing act to bring the Fed back to normal: She must withdraw the Fed’s stimulus without destabilising the economy.
“If we’re moving to an era where things will become less accommodative, then we’re in the Yellen era,” said Jay Bryson, a global economist at Wells Fargo.
The Fed did reiterate its plan to maintain its benchmark short-term rate near zero “for a considerable time”. Most economists predict the Fed won’t raise that rate, which affects many consumer and business loans, before June.
But its confirmation that it would end its bond buying programme and perhaps move closer to a rate increase suggested the start of a new period for the Fed.
“The trick will be normalising interest rates without creating another recession or unleashing higher inflation or adding to global financial instability and financial bubbles,” Anderson said.
Michael Hanson, senior economist at Bank of America Merrill Lynch, said the Fed still appears likely to put off any rate increase until at least mid-2015. “This isn’t the Fed rushing to the exits,” he said.
Hanson noted that while the Fed kept its “considerable time” phrasing, it added language stressing that any rate increase would hinge on the economy’s health. Previously, many analysts had interpreted the “considerable time” phrase to mean the Fed wouldn’t raise rates for a specific period after it ended its bond purchases.
