Janet Yellen has been confirmed by US Senate as the next head of the Federal Reserve.
Fifty-six senators voted in favor of Janet Yellen with 26 opposed – many members of the chamber were unable to attend the vote because of bad weather.
It was the last procedural hurdle for Janet Yellen, 67, before taking over from outgoing chair Ben Bernanke on February 1st.
Janet Yellen is the first woman to lead the central bank in its 100-year history.
President Barack Obama welcomed the vote, saying in a statement: “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.”
Originally from Brooklyn, New York, Janet Yellen served as chair of former President Bill Clinton’s Council of Economic Advisers and was an economics professor at the University of California, Berkeley.
Janet Yellen has been confirmed by US Senate as the next head of the Federal Reserve
During the Senate session to confirm her as the head of the central bank, many senators praised her long-term focus on unemployment.
Janet Yellen is the first Fed chair nominated by a Democratic president since Paul Volcker left the top spot in 1987.
She will face a difficult road ahead once Ben Bernanke steps down after eight years in office.
Although most analysts expect Janet Yellen to continue Ben Bernanke’s efforts to boost the US economy by keeping short term interest rates low, she will eventually face unchartered territory once the central bank begins to ease back on its extraordinary measures.
Janet Yellen was a strong supporter of the Fed’s current stimulus efforts – a $75 billion a month bond buying program known as quantitative easing. By buying bonds, particularly mortgage bonds, the Fed has tried to keep long term interest rates low to spur housing activity and encourage investors to spend, rather than save, their money.
In doing so, the Fed has amassed close to $4 trillion in assets since it first initiated its stimulus efforts in the wake of the 2008-2009 financial collapse – a fact that some senators criticized during Monday’s confirmation hearings.
Although the central bank announced plans to cut its purchases from $85 billion a month to $75 billion a month in December, Janet Yellen faces the difficult task of assessing when and how to ease stimulus efforts.
Minutes of the Federal Reserve’s July meeting revealed few clues about the central bank’s timeline for unwinding its extraordinary efforts to support the US economy.
Officials said they were “broadly comfortable” with plans to scale back the Fed’s $85 billion a month bond-buying programme.
However, the timing remains murky.
Almost all agreed a change in the programme was “not yet appropriate” but “a few” favored swift action.
Fed officials said that recent economic data had been “mixed”, which could indicate that plans to begin the so-called “taper” might be put off if the economy were to weaken.
The central bankers will reconvene on September 17 for a two-day meeting, which will be followed by a press conference by chairman Ben Bernanke.
Minutes of the Federal Reserve’s July meeting revealed few clues about the central bank’s timeline for unwinding its extraordinary efforts to support the US economy
The Dow tumbled by more than 100 points after the minutes were released, although quickly recovered. The S&P 500 and Nasdaq also fell briefly.
After Ben Bernanke hinted at plans to end the bank’s accommodating monetary policy in June, mortgage rates jumped sharply, threatening a fragile housing recovery.
Fed officials acknowledged that market reaction to discussion of an easing of expansionary monetary policy has been volatile.
“Meeting participants pointed to heightened financial market uncertainty about the path of monetary policy and a shift of market expectations toward less policy accommodation,” according to the minutes.
The September Federal Open Market Committee meeting will occur after a spate of economic data has been released, including another jobs report as well as revised second-quarter GDP estimates.
Officials hope this new data will help give them a better sense of when tapering should begin, which many investors believe will happen sometime before the end of this year.
Ben Bernanke has indicated that the timing of the Fed’s decision will be dependent on a healthy US economy.
Most Asian markets have fallen again as investors continue to react to news that the Federal Reserve could begin to scale back its stimulus programme.
South Korea’s main index dropped 1.5% while Australia’s lost 0.4%. However, Japan’s Nikkei reversed early losses.
The indexes in Shanghai and Hong Kong were down more than 2% in early trade but pared losses.
On Thursday in the US, the Dow Jones share index fell 2.3% – its biggest drop this year.
The Fed has been trying to support the weak US economy by buying bonds at a rate of $85 billion a month, under a policy known as quantitative easing (QE).
However, on Wednesday, Fed chairman Ben Bernanke said that if the US economy continued to show sign of improvement the central bank could start to slow down its bond purchases as early as this year and end the programme next year.
Most Asian markets have fallen again as investors continue to react to news that the Federal Reserve could begin to scale back its stimulus programme
The excess liquidity in the US has meant a lot of funds have been flowing into emerging markets, especially in Asia.
“Asia has benefited from US capital inflows, partly in relation to QE,” said Mitul Kotecha, from Credit Agricole CIB.
“It has been force-fed with steroids, and now that the steroids are going to be pulled back what will happen is a period of transitional volatility that can continue through summer.”
Currencies in Asia were weak as well against the US dollar, however the weakness in the Japanese yen caused a big reversal in the Nikkei in late trade.
The Nikkei, which had sank more than 2% during the morning trading session, finished 1.7% higher.
A weak yen is good news for Japanese exporters as it makes their goods cheaper overseas and boosts profits that are repatriated back home.
Exporters led the gains with Suzuki Motor jumping nearly 4% and Fast Retailing surging more than 6%.
Global markets have fallen sharply after the Federal Reserve signaled it may begin to scale back its stimulus of the US economy later this year.
European stock markets were down 3% or more by the close, as US markets fell a further 1.5% at their open.
Other risky investments, such as bonds and commodities also fell, with short-term cash offering the only safe haven.
The dollar rose as markets anticipated US interest rates rising sooner than had been thought, while the yen fell.
The markets were spooked after Fed chairman Ben Bernanke said that if the central bank’s forecasts were correct, it could begin slowing down its “quantitative easing” programme of asset purchases by the end of 2013, and wind them down completely by the middle of 2014.
The end of the asset purchase programme would mark a return to the use of interest rates as the monetary policy weapon of choice.
The Fed has been buying bonds at a rate of $85 billion a month, but believes it may be able to scale this back as the US economy recovers and end the programme next year.
The Fed has kept short-term interest rates in a range between zero and 0.25% since December 2008.
Although they are expected to remain close to zero for at least a couple more years, Ben Bernanke’s comments raised market expectations that the short-term cost of borrowing would rise sooner than had previously been thought.
Ben Bernanke emphasized that the programme was tied to how well the US economy, and in particular the US jobs market, was doing.
However, his comments led to a widespread equity sell-off in the US late on Wednesday, with US markets down 1%.
The rest of the world followed suit on Thursday, with the market slide gaining momentum, with US markets falling further after they reopened.
The latest market sell-off continues a steady decline in share prices worldwide over the last month.
It repeats similar market sell-offs at the same point in the interest rate cycle in 2003 and in 1993-94 when investors started to anticipate a return to interest rate rises.
The expectation of rising interest rates also infected bond markets, which normally provide a safe haven from falls in the stock market.
Global markets have fallen sharply after the Federal Reserve signaled it may begin to scale back its stimulus of the US economy
The 10-year US Treasury bond fell sharply in price on Wednesday, causing its yield – the yearly return earned by investors and the implied cost of borrowing of the US government – to rise from 2.19% to 2.35%. On Thursday morning, the rate crept higher to 2.38%.
Borrowing costs also rose in other countries – particularly for debtors deemed by markets to be riskier, including recession-hit southern European countries such as Spain and Italy.
Even the yield on super-safe German government bonds edged higher, in part due to the widely perceived unwillingness of the European Central Bank to cut eurozone interest rates.
Investors have also been rattled by events in China, where the country’s economy appears to be slowing sharply, and its banking system is experiencing severe stress as the Chinese central bank seeks to rein in what the authorities increasingly see as the excessive and opaque lending of recent years.
With the central bank unwilling to make cheap loans easily available, the interest rate at which Chinese banks were willing to lend to each other overnight jumped to an unprecedented annualised 30% on Thursday.
The double-digit, reminiscent of the 2008 Western financial crisis, may imply a collapse of confidence in the interbank market as well as an unwillingness of the central bank to accommodate the banks.
There are widespread fears that the state-owned banks may be facing heavy losses on the glut of loans they rushed out over the last five years in order to keep the Chinese economy afloat despite the stagnation of its main Western export markets.
Evidence that both the US and Chinese central banks were taking their foot off the economic accelerator also depressed global commodities market.
China is the dominant consumer of many of the world’s raw materials, particularly industrial metals, iron ore and other materials used in its construction boom.
The price of copper futures – a bellwether of Chinese demand – fell 2.4% and threatened to break through lows set in April.
The prospect of higher interest rates in US dollars also translated into a stronger US currency.
All major currencies fell against the dollar, as did the price of precious metals.
Gold resumed its rout of recent months, dropping another 6% on Thursday. It is now down 28% since the apparent bubble in the metal burst in October.
The price of silver – the more volatile of the two – fell 6.4%.
The metals have proved popular among investors who fear that the Fed’s money printing would eventually result in sharply rising prices – something that has as yet failed to materialize.
However, they failed to enjoy their traditional safe haven role in the current market turbulence – a role that has instead been usurped by US dollar cash.
The US Federal Reserve released transcripts from its 2007 meetings have shown it may have underestimated the looming global financial crisis.
The documents suggested Fed Governor Ben Bernanke wanted to hold off from addressing rising panic in the markets.
Ben Bernanke said in December 2007 that he did not “expect insolvency or near insolvency among major financial institutions”.
Yet many US banks and other financial firms had to be rescued in 2008.
With most of the country’s major lenders discovering billion-dollar losses linked to bad mortgage debt as the US housing market collapsed, investment banks such as Bear Stearns needed government funds ahead of being sold off cheaply, while another, Lehman Brothers, was ultimately closed down.
In 2008, the US government also had to bailout the federal mortgage agencies, Fannie Mae and Freddie Mac.
The US Federal Reserve released transcripts from its 2007 meetings have shown it may have underestimated the looming global financial crisis
Although the financial crisis started as a result of the sharp downturn in the country’s housing market, it quickly spread around the world as US mortgage debt had been repackaged and sold to banks and other financial institutions around the globe.
The released Fed documents from 2007 also suggest current US Treasury Secretary Timothy Geithner underestimated the crisis.
Timothy Geithner, who at the time was president of the New York Federal Reserve Bank, said in August 2007: “We have no indication that the major, more diversified institutions are facing any funding pressure.”
Meanwhile in October 2007 Janet Yellen, another member of the Fed’s most senior committee, the Federal Open Market Committee, said: “I think the most likely outcome is that the economy will move forward toward a soft landing.”
The Fed did, however, take some action in 2007 to try to resolve the growing problems in the financial sector, cutting US interest rates three times.
In September 2007 it reduced its core rate to 4.75% from 5.25%, where it had been for more than a year. Two other rate cuts followed by the end of the year, before numerous further reductions in 2008.
And Janet Yellen said in December that “the possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real”.
US rates currently stand at between 0% and 0.25%, where they have been since December 2008.