Yellen nomination as Fed Chairman will bring consistency

President Barack Obama is expected to announce later today the nomination of Janet Yellen, the current Vice Chairman, as the Chairman of the US Federal Reserve.

The nomination had been widely expected after Larry Summers unexpectedly pulled out of the race a month ago to shield Obama from a potential rejection in the Senate. Senior ranking Senators have been lobbying the White House for the nomination of Janet Yellen and so her ratification is seen as a mere formality.

Timing of Yellen’s appointment should not be underestimated

The timing of her appointment is important as it comes in the midst of the partial government shut down and the looming Debt Ceiling deadline of 17^th October, which could put the US into a default scenario. On the one front Obama is sending a signal to the markets that they are moving forward despite the shutdown and eradicating any doubts as to who will lead the Fed when Bernanke’s term finishes at the end of January. And to Congress, Obama is giving them the Fed Chairman that they want, making a proactive step to bi-partisan talks at a time when the two parties are deadlocked on the US government shutdown and the looming US debt ceiling deadline. Let’s not forget that it was high ranking Senators who publicly forced Larry Summers out of the picture. Summers’ ratification was improbable, Yellens is a certainty. This is not an olive branch to Republicans, but more of a signal of “okay, let’s work together.”

What will Yellen bring to the Fed?

1. Policy consistency

Yellen has long been called a ‘dove’, favouring accommodative monetary policy and so in this sense she will bring a sense of consistency. She sings from the same hymn sheet as Ben Bernanke and so it is unlikely we will see an aggressive change in monetary policy with Yellen at the helm of the Fed, at least in the near term. That gives investors confidence and transparency. However, it must be remembered that Yellen has a monumental task: to lead the markets through a come down from QE, a come down that will likely spark a price re-adjustment and heightened volatility. This is no easy task.

2. Proactiveness

Yellen is credited with being one of the most proactive members of the Fed to tackle high unemployment in the US labour market – which topped at 10% in October 2009. She has also made speeches in the past which elevate concerns about rising inflation – which is part of the Fed’s (recently forgotten) mandate.

3. Communication

Yellen believes in transparency with the markets on Fed policy and this is welcome. We should expect at the very least the same levels of communication from the Fed under Yellen as we have grown used to under Bernanke. Her appointment should herald a continuation of central bank forward guidance to the markets, reducing the potential for short term policy induced shocks.