The Yellen effect on the World Markets

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The nomination of the new Fed Chairman has raised key questions about the effects on world markets and new policy going forward.

federal reserve bank
The Yellen effect on the world markets

As Larry Summers drops out of contention to become the next Federal Reserve Chairman, it seems the new favorite is going to be Janet Yellen. The announcement comes at the relief of many labor leaders who feel that her fight against unemployment and controlling inflation is a good step going forward. The position Yellen has taken in her past voting records does suggest that her priority is going to be more focused on employment while trying to stimulate the economy and address the recessionary issues plaguing the economy.

This is in line with the former Fed Chief, Ben Bernanke who used the monetary policy in order to stimulate the economy and control the unemployment rate which has been sliding since the crisis began in 2008. Yellen has supported the Feds three rounds of asset purchases that had been carried out by the Fed and now the Fed feels that the efforts can be curtailed as employment is finally showing signs of recovering.

Still, a tapering of movement is not to be seen as a tightening of monetary policy and the record low interest rates are a testament to that move. The sentiment at the Fed and in the markets now, is that the low interest rates will carry forward the momentum that has been created in the economy, and the tapering-off of the asset purchase will allow the markets to take hold of the baton from here on.

Janet Yellen is a former professor of University of California, at Berkley and has worked under Bernanke making sure that the Fed could be made more transparent and interactive. Obama’s top candidate for the post seems to be picked personally as she has repeatedly emphasised the need for job creation throughout the economy, which has been Obama’s priority all along. He promised to create more job opportunities through the 2008 Presidential campaign and this will seem to be one more step in the right direction. This unorthodox approach to the post which has always given preference to inflation control rather than job creation, can signal a more relaxed monetary policy approach in the future.

The relaxing of the monetary policy will ensure the economy has the ability and capacity to expand and grow, in order to increase jobs once the rebound is in full swing. Inflation would become an issue that would be addressed if and when it surfaces later on. Recent speeches and articles by Yellen clearly show that she has unemployment in her crosshairs and has always believed that government can take the necessary steps to increase employment, keep wages on track with the cost of living and have a long term policy to curtail any ill effects the policy might have on other spheres of the economy.

She has always contended that the cost of unemployment on the economy will dampen any economic growth and the deadweight has to be addressed which makes the economy less lethargic and more responsive. As far as her policy is concerned, experts believe that her chairmanship will mean a stickier Fed fund rate which will stagnate the interest rates in the economy. Her view is that if unemployment is creeping upwards, then employs lower interest rates, currently at zero, and supplements it with other moves. Once the employment rate reach a desirable level, only then, will rates be used to take care of other economic indicators.

She has gone as far as to say that if there is a tradeoff between unemployment and inflation, she would rather have higher prices than people out of work.

Currently there is an inflation threshold which the Fed targets and tries to stay under, but her hiring means that this threshold will be allowed to rise. This would mean that as her nomination process goes forward and she is chosen Fed Chairman, there might be a rise in the equity and oil markets as more economic development will be expected — but once inflation does start taking effect, if that is allowed to happen, gold will resume positive momentum. The loser might be the U.S. dollar and it is expected that the value of the greenback will drop, once inflation is put on the back burner by the central bank.

© Zain Naeem

Photo: Alex/Flickr

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