In a history-making selection, President Barack Obama nominated Janet Yellen to be chairman of the Federal Reserve, a critical post as the nation continues its fitful economic recovery. If confirmed she would be the first woman to lead the powerful central bank.
Yellen, who currently
holds the No. 2 spot at the Fed, would replace Ben Bernanke, whose eight-year tenure at the helm of the Fed ends Jan. 31.
Obama introduced Yellen as a "proven leader." "And she's tough, not just because she's from Brooklyn," he said. He credited her for being a consensus builder, adding: "She understands the human cost when people can't find a job."
Before selecting Yellen, Obama had considered nominating former Treasury Secretary Lawrence Summers, who had been a close Obama adviser during the first years of his presidency. But Summers withdrew in the face of opposition over his temperament and past support for bank deregulation.
Obama heaped praise on Bernanke for taking "bold action" at the height of the financial crisis in 2008 to "shore up our banks and get credit flowing again."
"Ben Bernanke is the epitome of calm, and against the volatility of global markets he's been a voice of wisdom and a steady hand," Obama said.
The central bank reaches into the lives of millions of Americans. Its two main missions are fostering maximum employment and stabilising prices. With its power to regulate the supply of money and set interest rates, it influences economic activity, hiring and inflation. It also is the leading regulator of banks and plays a crucial role as the country's lender of last resort when banks can't get their money elsewhere.
In accepting the nomination, Yellen said more still needs to be done to strengthen the recovery. She said the past six years have been tumultuous for the economy and challenging for many Americans. She said that while the recovery is not complete, "we have made progress, the economy is stronger and the financial system is sounder."
The challenges that lay ahead for Janet Yellen will require both the steely intellect and the personable style that many attribute to her.
The job as the world's most important banker comes with a daunting to-do list: deciding when to slow the Fed's stimulus, forging consensus from a fractious policy committee and calculating the effects of any economic slowdown from Washington's budget fight. That's in addition to monitoring volatile financial markets and fine-tuning the Fed's communications.
First, though, Yellen will have to get there. She will need to overcome Washington's toxic political environment and win confirmation from the Senate to succeed Ben Bernanke when his term ends Jan. 31.
It's almost enough to make you wonder why she would want the job.
Yellen is widely seen as a "dove" on Fed policy. She stresses the need to use the Fed's tools to boost growth and reduce unemployment in the sluggish aftermath of the Great Recession, rather than worry about igniting future inflation.
That view came through in her brief remarks Wednesday after President Barack Obama announced her nomination. Yellen said more needed be done to strengthen the economy. She added, though, "We have made progress. The economy is stronger, and the financial system is sounder."
In part for her perceived dovishiness, Yellen has been outspokenly backed by many Democrats in Congress and opposed by some Republicans.
She wasn't Obama's first choice to lead the Fed. That was Larry Summers, a former Treasury Secretary and chief White House economic adviser who withdrew from consideration in the face of widespread opposition.
James Rothman and Randy Schekman, of the United States, and German-born researcher Thomas Sudhof are projected on a screen, in Stockholm. (AP Photo)
Brian Gardner, Washington political analyst for Keefe, Bruyette & Woods, predicts that Yellen, widely respected as an academic economist and veteran policymaker, will be easily confirmed despite some Republican no votes.
Then the hard stuff begins.
Fed policymakers have been debating when and how to scale back $85 billion a month in bond purchases designed to spur economic growth by reducing long-term interest rates, driving up stock prices and encouraging borrowing and spending. Yellen was a key architect of this strategy.
In September, the Fed surprised financial markets by deciding not to scale back its bond purchases. It concluded that that the US economy wasn't yet healthy enough for the Fed to ease its stimulus even slightly. Fed officials also worried about the budget stalemate that's since led to a partial shutdown of the government and threatens to trigger a default on government debt.
Many analysts now don't think the Fed will reduce its stimulus before next year. And with the dovish Yellen as chairman, the Fed would likely be cautious about any pullback in early 2014.
For now, there's another problem, too. There isn't much official economic data to go on. The shutdown that began Oct. 1 forced the Labor Department to cancel its all-important jobs report for September. It's still unclear when the jobs report will come out.
The choice of Yellen to lead the Fed also comes amid worry and uncertainty about how much damage the shutdown might cause the US economy. Graver yet is fear that lawmakers won't raise the government's borrowing limit this month. If they don't, the government could eventually default on its debt, possibly causing another recession and financial crisis.
As chairman of the Fed, an independent agency that steers clear of Congress' affairs, Yellen can be little more than a spectator.
"There's really nothing she could do about the debt ceiling," noted Joseph Gagnon, senior fellow at the Peterson Institute for International Economics.
One especially delicate challenge for Yellen will be to refine the Fed's communications with the public. Bernanke opened the once-secretive Fed to far more public scrutiny. He was the first chairman, for example, to hold regular news conferences. And the Fed went much further to signal its likely policy actions.
This hasn't always gone smoothly. The Fed has sometimes rattled investors instead of calming them. In fact, according to minutes of the Fed's September meeting, Fed officials worried about delaying a pullback in its bond purchases on September because they feared this might confuse investors.
A finely calibrated communications strategy will likely be high on Yellen's list of goals.
Further down the list could be another huge challenge: How and when to start shrinking the Fed's portfolio of bonds. The Fed's purchases have swollen its investment portfolio to $3.7 trillion, a record by far. Eventually, perhaps under Yellen, the Fed will have to start unloading the bonds without shaking financial markets. It will be a tough task.
US President Barack Obama announces his nomination of Janet Yellen to head the Federal Reserve, along with current Fed Chairman Ben Bernanke, at the White House in Washington. (Reuters Photo)
Yellen would also take over the Fed at a critical time for China, the world's No. 2 economy after the United States, and other developing nations.
The International Monetary Fund, citing slower growth in China, India and Brazil, downgraded its forecast this week for global economic growth to 2.9% in 2013 and 3.6% in 2014. Both are 0.2 percentage point weaker than the IMF's previous forecast in July.
Investors have been pulling money out of developing markets, partly to take advantage of rising interest rates in the United States. The Fed might be called upon to help calm worldwide financial volatility.
"The role of the Fed chair is so critical," said Greg McBride, senior financial analyst at Bankrate.com. "We're not just talking about the US economy. We're talking about the global economy."
Yellen will also have to establish herself as chair at a time when the Fed is experiencing unusual turnover. When Bernanke leaves Jan. 31, but there could be up to four vacancies that Obama would need to fill on the seven-member Fed board.
One board member, Elizabeth Duke, left in August. Another, Sarah Bloom Raskin, has been nominated by Obama to become deputy Treasury secretary. The term of a third, Jerome Powell, will be up Jan. 31, though he can remain on the board until a successor is confirmed by the Senate.
And Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, has announced that she will leave early next year.
Most analysts say they're confident Yellen can handle the many challenges.
"By temperament, by mannerism and by extensive experience, I think she is better prepared for that job than almost anybody on the face of the earth," says Alan Blinder, a Princeton University economist and former Fed vice chairman who served with Yellen at the Fed in the 1990s.
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