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Certain gesture

9 October 2013 By Daniel Indiviglio

U.S. President Barack Obama’s pick to be the next Federal Reserve chair looks timed to calm the market. Janet Yellen appears set to get the nod on Oct. 8 to run the central bank. That will mark a safe, boring end to a wild nomination process. But a little certainty is what global investors need from a politically chaotic Washington. A debt ceiling deal remains elusive, but at least there’s some predictability on Fed policy.

Yellen’s appointment will hardly be a surprise. She has been the top candidate to replace current Chairman Ben Bernanke since Larry Summers – Obama’s preferred, and highly controversial, choice – removed himself from consideration. Even before that, many in Congress and the market, as well as plenty of economists, considered her the most qualified candidate.

Anointing her now, though, might on first blush look odd. After all, Summers pulled out of the race almost a month ago. And Obama has far more pressing matters on his hands at present: the partial shutdown of the federal government has just entered its second week and in eight days’ time the nation will be dangerously close to defaulting on its debt, if no agreement is reached.

The president, though, is actually making a savvy move. Nominating Yellen now means Obama can administer to the market a dose of certainty on policy he has significant control over. He’ll also shift some of the news cycle away from debt ceiling antics. Neither measure can hurt: political volatility drove 1-month Treasury bill yields up to 0.27 percent on Oct. 8 from 0.08 percent six days earlier. 

Yellen may have a hard time forging her own path. She has no choice but to find a way to shrink the Fed’s near-$4 trillion balance sheet. She also has a great deal of forward guidance to maintain. So if inflation eventually picks up, she’ll need to disrupt markets by raising rates sooner than expected. 

Global investors may be relieved to see continuity in two of the most important central banks – Bernanke’s own vice chair looks set to succeed him, while China extended Zhou Xiaochuan’s term earlier this year. Of course, a U.S. debt crisis triggered by a dysfunctional U.S political process may still render that moot.


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