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 When she succeeds Ben Bernanke, whose second four-year term as Fed
chairman expires on January 31, Yellen will become the first woman
to run the Fed in its 100-year history and just one of a handful of
women heading central banks globally. She is currently the Fed's
vice chair.
The vote to approve her was 56-26. She won resounding support from
Democrats, who were joined by 11 Republican senators. All of the no
votes came from Republicans — a sign of discomfort with the U.S.
central bank's unconventional policies as well as the partisan
rancor in the Senate against any of President Barack Obama's
nominees.
"With the bipartisan confirmation of Janet Yellen as the next Chair
of the Federal Reserve, the American people will have a fierce
champion who understands that the ultimate goal of economic and
financial policymaking is to improve the lives, jobs and standard of
living of American workers and their families," Obama said in a
statement.
The Fed cut overnight interest rates to near zero in late 2008 as
the country struggled with a deep recession that left millions of
Americans out of work after the financial system imploded. It has
quadrupled its balance sheet to more than $4 trillion through a
series of massive bond purchase programs meant to push down
longer-term borrowing costs.
Yellen, 67, spent years defending those efforts, arguing both as
Bernanke's deputy and before that as head of the San Francisco
Federal Reserve Bank that they would reduce borrowing costs and spur
hiring and economic growth.
Now those policies appear to be working: the U.S. unemployment rate
fell in November to a five-year low of 7 percent and the economy
grew in the third quarter of 2013 at its fastest pace in almost two
years.
Yellen's main task in the world's most powerful financial post
likely will be to navigate the central bank's way out of its
extraordinary stimulus, beginning with dialing down its bond-buying
program.
In December, Bernanke began the process, leading the central bank to
its landmark decision to shave the bond purchases to $75 billion
this month from a previous monthly pace of $85 billion.
The entire program, known as QE3 because it is the Fed's third such
effort at so-called quantitative easing, will likely be shuttered by
late 2014 so long as the economic recovery proceeds as forecast,
Bernanke said.
Many Republicans and several of Yellen's own Fed colleagues see the
wind-down of that program as long overdue and warn that the buildup
of bonds on the Fed's balance sheet could stoke inflation or
asset-price bubbles.
The vote count was unusually low because several senators were
delayed by bad weather as they attempted to return to Washington.
Even so, Yellen's margin of victory was historically weak. It
compares to Bernanke's weak 2010 re-appointment vote of 70-30, which
at the time was the weakest endorsement on record.
"This expansionary monetary policy cannot continue into perpetuity
without causing real and lasting damage to our economy," said
Senator Charles Grassley, an Iowa Republican.
Those concerns notwithstanding, analysts by and large expect Yellen
to stick with the "dovish" approach to policy that she has long been
known for, with a focus on reducing unemployment, particularly if
inflation continues to run well below the Fed's 2 percent target.
"The transition from the Bernanke Fed to the Yellen Fed likely will
be a very smooth one," said Dana Saporta, an economist with Credit
Suisse in New York. "While we suspect she may tolerate modestly
above-target inflation to promote greater employment gains, Yellen
has not wavered in her public support for the Fed's 2 percent
inflation target."
Yellen has long argued that the Fed should tolerate slightly higher
inflation if that is the cost of fighting high unemployment. But she
has also advocated interest rate increases when she felt the threat
of inflation called for them.
"She is a strong person but she is also one who is open to other
people's opinion and learns quickly," said Bill Rhodes, president of
William R. Rhodes Global Advisors and a former senior vice chairman
at Citigroup. "I think there has been a tendency to underrate her
ability, frankly."
Yellen is the first person appointed to an initial term as Fed chair
by a Democratic president since Jimmy Carter named Paul Volcker to
head the U.S. central bank in 1979. Although both Bernanke and his
predecessor Alan Greenspan were reappointed by Democrats, their
initial nominations were made by Republicans — George W. Bush and
Ronald Reagan, respectively.
And with Obama already one year into his second and last term as
president, Yellen's appointment means his influence on economic
policy will extend beyond his presidency.
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OLD HAND
Yellen's rise to the top of the world's most influential central
bank marks an important milestone for women, long under-represented
in the field of economics and finance.
"She is breaking an incredibly important glass ceiling," Terry
O'Neill, president of the National Organization for Women, a liberal
group that advocates for gender equality, told Reuters.
Even with the Fed's December decision to pare its bond buying and
set out a road map for the wind-down, the Yellen Fed will have
plenty of discretion. She could wait before making further
reductions if the recovery stalls, or dial the program down faster
should the job market strengthen unexpectedly.
The Fed sought to soothe investor angst over the reduction in asset
purchases with a strengthened pledge to keep benchmark overnight
interest rates low for a long time to come.
Maintaining the credibility of this pledge will be key to keeping
rates from rising too far, too fast, a key challenge for Yellen as
she faces the delicate task of setting the Fed back on the path to
more normal monetary policy without rattling financial markets or
disrupting the U.S. economic recovery.
As she confronts that assignment, Yellen will draw on years of
experience as a top economic policymaker, including her six years as
chief of the San Francisco Fed and her more than three years as the
central bank's No. 2 official.
She also served on the Fed's board in the 1990s when Alan Greenspan
was chairman and as a top economic adviser to President Bill
Clinton.
Yellen is a well-respected economics scholar and has taught at the
Harvard University, the London School of Economics and the
University of California, Berkeley.
Her research, some of it conducted with her Nobel-laureate husband
George Akerlof, includes papers on topics as disparate as the rise
in single motherhood, wage inflation and the negative effects of
advertising.
As the Fed's vice chair, she spearheaded the central bank's adoption
of a 2 percent inflation target and has championed the forward
guidance the Fed has used to shape market expectations about the
path of interest rates.
The central bank has said since December 2012 that it would hold
rates near zero at least until unemployment falls to 6.5 percent, as
long as inflation stays in check. Last month it said it expected to
hold rates steady "well past" the time the jobless rate threshold is
reached.
FILLING HOLES
Obama is expected to nominate former Bank of Israel head Stanley
Fischer, an American-Israeli, to replace Yellen as vice chair.
But he will need to fill at least two other seats on the
seven-member Fed board. One was left vacant when Elizabeth Duke
departed in August and another is expected to be vacated soon when
Sarah Bloom Raskin departs for the No. 2 job at the U.S. Treasury.
Yellen's road to the helm of the central bank was a highly political
one that ran through last summer.
Obama only settled on her after his former economic adviser Lawrence
Summers withdrew from consideration in the face of fierce opposition
from within the president's own Democratic Party. That opposition,
centering on questions about Summers' temperament for the top Fed
job and concern over his part in deregulating the banking industry,
raised doubts about his chances of winning Senate confirmation.
(Additional reporting by Jonathan Spicer in New York; writing by Ann
Saphir; editing by Tim Ahmann and Leslie Adler)
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