President Barack Obama plans to nominate Janet Yellen as the next chairman of the Federal Reserve Board. In doing so, he will promote the pre-eminent policy economist of her generation to the role of the most powerful central banker in the world.
Yellen is quite simply more qualified for the job than any of her predecessors. She's an imaginative and technically adept economist possessed of a brilliant and precise mind. As a researcher, she has made fundamental contributions to our understanding of unemployment and the importance of smoothing out the ups and downs of the economy. She has demonstrated an ability to navigate political corridors, having served successfully as the chairman of President Bill Clinton's Council of Economic Advisers.
She's also battle-tested, having worked in key policy roles through both the Asian financial crisis and the recent global financial crisis. She has spent most of the past two decades as a leading voice within the Fed, initially as a member of the Federal Reserve Board of Governors, then as president and chief executive officer of the San Francisco Federal Reserve Board, and over the past four years as vice chairman of the Federal Reserve.
No Fed chairman has ever been subject to as robust a public vetting as Yellen has over the past two months. It's notable that through the drawn-out public debate over who should replace current Fed Chairman Ben Bernanke, not a single economist who has ever worked with Yellen has had a bad word to say about her.
David Fuller's view We may never know the real reason why Barrick Obama initially ignored Ben Bernanke's choice of Janet Yellen as his successor, not to mention the choice of many other Fed officials and most of the President's fellow Democrats of influence. Could it have been because President George W Bush appointed Bernanke as chairman of the Federal Reserve in 2006? Whatever, Obama nominated the controversial Larry Summers, who eventually had the good sense to withdraw from consideration, sparing the President further embarrassment.
Most investors clearly favour Janet Yellen's nomination, albeit delayed, and I agree with them. Ben Bernanke's quantitative easing (QE) will remain controversial for many years. However, if it continues to keep the US economy out of a deflationary slide, as Bernanke clearly intended, that will justify its use. Janet Yellen will not be in a hurry to end QE.
Critics say that the Fed has poured $85bn into the system each month with little affect. That verdict is premature, given the history of slow economic recoveries following credit crisis recessions. Since the response to a severe credit crisis slump is for consumers and businesses to initially deleverage, then lower debts where possible and increase savings, how could the US economy recover quickly? Historian economists have pointed out that it takes at least five to seven years for GDP growth to regain its pre-crisis momentum. Today, little more than four years have passed since the bottom of the credit crisis in 1H 2009.
Moreover, the global economy remains soft although it is slowly recovering. Against this background very few central banks are going to increase interest rates quickly and risk a slide back into recession. The exceptions are countries such as India which had a slumping currency and too much inflation.
However, global monetary policy will remain generally stimulative. That is a tailwind for stock markets, although many are passing through a somewhat choppy period in response to higher valuations and uncertainty caused by the temporary and distinctly partial US government shutdown. If that is resolved in the next two to three weeks, as seems likely, stock markets could have a reasonable yearend