What kind of Fed will Janet Yellen lead?
The financial community has been discussing Janet Yellen's upcoming role as chair of the Federal Reserve since Larry Summers withdrew his candidacy earlier this year. While few dispute that she will track a significantly different course from her presumed predecessor, Ben Bernanke, there are some observers who believe that she might tack a more labor-oriented approach to the extraordinary measures taken by the American central bank since the Great Recession first began.
Yellen is well-known as a strong advocate for quantitative easing (QE), but her motivations for doing so may be less aligned with Bernanke's. The current Fed chair is known to be conscious of the mistakes made during the Great Depression – his doctoral thesis focuses on the failures of the U.S. government at that time. Therefore, he has tried to balance support for both Main Street and Wall Street following the market collapse of 2008. Yellen, on the other hand, has voiced concern in the past that the Fed's dual mandate – price control and full employment – might need to be refocused on the latter, particularly in ways that help alleviate the dramatic decline in the labor participation rate. This calculation has fallen to 35-year lows, reflecting a grim job market and a constant threat to the economic recovery.
In a statement published by the Fed yesterday, Yellen declared that the Fed would continue to play a strong role in the market.
"The Fed has powerful tools to influence the economy and the financial system, but I believe its greatest strength rests in its capacity to approach important decisions with expertise and objectivity, to vigorously debate diverse views and then to unite behind its response. The Fed's effectiveness depends on the commitment, ingenuity, and integrity of the Fed staff and my fellow policymakers. They serve America with great dedication," she was quoted as saying in a press release.
Do investors need to take additional steps in preparation of a Yellen Fed? Not necessarily, given the fact that QE – a big support mechanism in the markets right now – will not be tapered until at least following Bernanke's exit. On the other hand, with the current government funding impasse and the risk of a debt-ceiling breach, market participants should protect themselves with portfolio management tools that reduce risk and increase flexibility. Explore the use of SmartStops today to learn more!