What's Yellen Got to Do With It?


When it’s all said and done, the government shutdown will likely have only a minor impact on fourth quarter GDP. The greater question is what impact this will have on confidence across corporations, consumers and investors. Recent data suggests that economic confidence was negatively impacted by Washington’s lack of resolve. Markets, however, seemed to have shrugged off the turmoil relatively easily, but that may not have been the case if monetary policy conditions weren’t as accommodative.

So, President Obama’s decision to nominate Janet Yellen to succeed Ben Bernanke as the Chairman of the Federal Reserve amid the over two-week government shutdown warrants further attention. Most portray Yellen as an ultra-dovish economist, and while she’s certainly in the accommodation camp, that characterization is an oversimplification.In fact, one of reasons for this recent portrayal has been based on her less than rosy outlook for US economic growth and the lack of a pickup in inflation. Unfortunately she’s been accurate as the economy continues to exhibit significant slack even at this stage of the recovery.

So, what can we expect from her atop the Fed? Based off of her record, she’ll likely be a Fed Chair with an intense reliance on economic models, especially in regards to the path for employment. Today’s low levels of inflation and continued deflationary forces provide cover for further accommodation. The FOMC certainly remains concerned with the tightening of financial conditions, especially since mortgageapplications fell when rates increased. Yellen will continue with Chairman Bernanke’s focus on greater transparency and more open communication.

In fact, Yellen will likely further strengthen this approach in regards to forward guidance. She’ll also be more willing to make her specific views heard than Bernanke did. This may help avoid the miscommunication around this summer’s taper trade. We will need to see firmer employment data before the Fed is comfortable dialing back even as some become increasingly concerned with the broader impacts to speculative activity.