By Jon Hilsenrath, Pedro Nicolaci da Costa and Victoria McGrane
The U.S. Federal Reserve enters a year of leadership transition and debates over how to wind down some of its easy money policies as the economy strengthens in 2014.
- The U.S. Federal Reserve building in Washington.
- Reuters
If all goes according to policy makers’ plans, Janet Yellen will soon succeedBen Bernanke as Fed leader and quickly face multiple challenges, including guiding Fed policy, forging consensus within a fractious policy committee and honing her public communication skills.
The Senate plans to vote Jan. 6 on her nomination to become Fed chairwoman. She is expected to win confirmation and take the top job Feb. 1.
Mr. Bernanke, who served eight tumultuous years as Fed chairman, will preside over the Fed’s first policy meeting of the year, Jan. 28-29. His last day at the central bank is Jan. 31.
Fed officials will debate at that meeting whether to keep scaling back their bond-buying program, which aims to lower long-term interest rates to help boost growth and hiring. The Fed cited a brightening economic picture in December when it decided to cut the monthly pace of bond purchases to $75 billion, starting in January, from $85 billion previously.
Mr. Bernanke said at a press conference after that meeting that Fed officials would likely continue paring the bond buys by $10 billion at each meeting if the economy keeps improving as they expect. But he stressed that the process is not on a preset course. If the economic data disappoint, they might leave the amount of bond purchases unchanged at a meeting. If the recovery picks up more than they expect, they might cut it by bigger increments.
Fed policy makers continue to disagree over the merits of the bond-buying program. One voting member of the Fed’s policy making committee, Boston Fed President Eric Rosengren, dissented at the December meeting, saying it was too soon to pull back on the program with unemployment still high and inflation well below the Fed’s 2% target. Other members of the committee opposed the program from the start, doubting its value and worrying it risks fueling higher inflation or financial instability.
By the time Ms. Yellen presides over her first meeting as chairwoman in March, the officials will have seen a few more months of economic data. If the figures paint a clear picture, she may have an easy time corralling them into agreement. If the portrait is muddy, she could have a harder task.
Another policy issue for her and her colleagues is to ensure the Fed’s easy money programs don’t spark a new financial bubble, while not retreating from the policies so quickly that they damage the economy.
The group will also gain some new members over the course of 2014. President Barack Obama is expected to nominate Stanley Fischer, former head of the Bank of Israel, to become the Fed vice chairman. Another seat on the board is vacant and at least another is expected to open up in 2014. The Federal Reserve Bank of Cleveland is also looking for a successor to President Sandra Pianalto, who steps down in early 2014.
Once the committee agrees on what to do, Ms. Yellen will be the one to explain their policies and thinking to the markets, Congress and the general public. She has experience as a public speaker, having been the Fed’s vice chairwoman since 2010 and head of the San Francisco Fed for six years before that. But she prefers meticulously prepared presentations to extemporaneous public speaking and as vice chairwoman has avoided congressional testimony.
She has not given any press conferences as Fed vice chairwoman, but will be expected to do so as Fed chairwoman, following the practice begun by Mr. Bernanke. It also remains to be seen if she’ll follow other precedents he set in Fed communications, such as granting TV interviews and answering student questions during a lecture series broadcast over the web.
More broadly, Ms. Yellen will face the same challenge all incoming Fed leaders face, “which is to establish their own credibility,” said Brian Gardner, a Washington analyst at investment bank Keefe, Bruyette & Woods Inc. Mr. Bernanke faced it in succeedingAlan Greenspan, who faced it following Paul Volcker. “It just goes with the nature of anybody succeeding a predecessor who’s been in for several terms and has a larger than life reputation,” he said.
Ms. Yellen “is going to have to establish her own credibility, her own stature, her own reputation,” he said. “Only time can do that; there’s no magic wand.”
