3 challenges awaiting Yellen as next Fed chairman

Published on NewsOK Modified: January 6, 2014 at 11:03 pm •  Published: January 6, 2014
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Janet Yellen, confirmed Monday evening to succeed Ben Bernanke as chairman of the Federal Reserve, will confront numerous challenges when she begins the job Feb. 1. Here is a look at three of them.

BOND PURCHASES

The Fed announced in December that the job market had strengthened enough for the central bank to reduce the extraordinary stimulus it's given the economy since the Great Recession. The Fed said it would trim its bond purchases from $85 billion a month to $75 billion starting in January. The bond purchases have been intended to keep long-term borrowing costs low to stimulate borrowing and spending.

Economists expect further modest reductions of around $10 billion a month. The bond purchases could be phased out altogether by year's end if the economy keeps improving.

Despite paring its new purchases, the Fed said in December that it would keep reinvesting its bond holdings. The bond purchases have raised its investment portfolio above $4 trillion — four times its size before the financial crisis.

The Fed will need to be careful in navigating the wind-down of its bond purchases. If it moves too fast, it could spook financial markets, sending stock prices plunging and interest rates rising. If it acts too slowly, it could run the risk of creating asset bubbles in areas of the economy from stocks to real estate.

GUIDANCE ON SHORT-TERM RATES

Investors will carefully watch Yellen for any signal that the Fed is preparing to raise its key short-term interest rate, which affects many consumer loans.

The rate has been near zero since December 2008. Last month, the Fed revised its guidance to say it plans to keep that rate ultra-low "well past" the time when the unemployment rate hits 6.5 percent. The rate reached a five-year low of 7 percent in November.



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