Last week Ms Yellen experienced her first visit to Washington DC’s Capitol Hill as the head of the central bank in control of the world’s largest economy.
The market reacted positively while Ms Yellen was speaking. The S&P 500 index rose during her appearance, possibly suggesting investors were unruffled by what she had to say.
“The buzz word has to be ‘continuity’,” said Joshua McCallum, senior fixed income economist at UBS Global Asset Management.
“She was very much at the centre of the monetary policy of the Federal Open Markets Committee [FOMC] under Ben Bernanke so there is a serious amount of continuity there.”
Neil Staines, ECU’s global macro team head of trading and execution, agreed.
“The transition between Ms Yellen and Ben Bernanke is fairly seamless,” he said.
“That comes from the fact she has been on the FOMC board for a number of years and has a similar background to Mr Bernanke, so there is no issue there for the market to be concerned about. It is very much business as usual.”
Indeed, Ms Yellen said in her speech to Congress that she expected a “great deal of continuity in the FOMC’s approach to monetary policy”.
Ms Yellen also sought to make a clear distinction between the reduction in the US’s bond-buying programme and the tightening of monetary policy.
Like her predecessor, the chairwoman was keen to differentiate between the two policies, so that as the Fed bought less bonds, the market did not push up rates.
Pushing rates up is, in effect, a tightening of monetary conditions but Ms Yellen was keen to stress monetary policy would stay loose.
“Tapering will continue but if the market starts to get ahead of itself and the economy, then she is likely to react to that and push back,” Mr McCallum said.
“The key part of what she got across was the difference between tapering and tightening,” Mr Staines said.
“That message that tapering is not tightening is key. One thing she said was that the US economy is meaningfully recovering, which is quite expressive, but she gave lots of caveats, essentially suggesting rates will not go up.”
Elsewhere, Mr Staines said Ms Yellen could surprise markets by being more hawkish than commentators believe she is.
“In some respects Ms Yellen is unfairly labelled with the arch dove tag but I don’t think this is necessarily true,” Mr Staines said.
“I think her style is to focus more on the data and I think she will surprise some of the hawks when the data starts to turn.”
But Mr McCallum thought Ms Yellen would have a more dovish approach.
He said unemployment had fallen a lot since the crisis but that the number of people employed had not changed.
“This means the odds of walking up to someone and asking them if they have a job, and them replying ‘yes’ has not changed,” he said.
He added there was an “as yet unresolved” debate within the Fed about whether the falling unemployment rate was structural – meaning less people were in the labour market because they were going to university or retiring – or whether it was cyclical, with the number of people in the labour force likely to rise as economic growth improved.
“People who believe it is cyclical will be more dovish, so they believe when the economy improves the labour data will get better,” he said.
“I think Ms Yellen will be inclined towards being more cyclical than structural.”
Janet Yellen’s ‘perfect start’
The Federal Reserve chairwoman Janet Yellen appears to have pulled off a perfect start to her new job.
She managed to keep investors calm, instil a sense that there would not be dramatic change at the Fed – something markets liked – and reiterated the body’s accommodative stance.
While she pleased onlookers in the US, those in emerging market economies would have been less reassured by her words.
Ms Yellen said the pace of the reduction in asset purchases would be linked solely to what was going on within US borders. If the removal of easy money impacted emerging markets, so be it.
“She is absolutely right about the fact the US needs to set its monetary policy for itself,” said Joshua McCallum, senior fixed income economist at UBS Global Asset Management.
“Countries most exposed to the US are the ones who let themselves run large current account deficits. It is a bit difficult for them to be complaining. If they are worried about US monetary policy, they need to let their exchange rates move, which will fix the problem.”
