Fed signals Yellen era

By Martin Krutsinger
Associated Press

WASHINGTON (AP) — When the Federal Reserve announced the end of its landmark bond buying program Wednesday, it also signaled 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 program Yellen inherited from her predecessor, Ben Bernanke, truly marks her inauguration. She can now begin to fully stamp her influence on the central bank.

With the job market showing steady gains, Yellen must now grapple with the fateful decision of when to raise short-term interest rates, which the Fed has kept at record lows since 2008 to help the economy.

“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, 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 destabilizing 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.

For Yellen and other Fed officials, the decision of when to begin raising rates toward their historic averages hinges on two major economic forces: Jobs and inflation.

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.

On balance, economists saw the Fed’s statement as showing less concern about unusually low inflation, which has helped delay a rate increase.

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.

The Fed’s statement was approved 9-1. The one dissent came from Narayana Kocherlakota, president of the Fed’s regional bank in Minneapolis. He contended that the Fed should have signaled its intention to maintain a record-low benchmark rate until the inflation outlook has reached the central bank’s 2 percent target.

Yellen has stressed that while the unemployment rate is close to a historically normal level, other gauges of the job market remain a concern. These include stagnant pay; many part-time workers who can’t find full-time jobs; and a historically high number of people who have given up looking for a job and are no longer counted as unemployed.