Janet Yellen’s appointment as a head of the US Federal Reserve System has brought no surprises. It was a matter of discussion during past several months. No disputes were seen among the voters, but now many experts try to predict further developments when Ms Yellen leads the central bank. The opinions are divided – some of experts support the new leader and some of them foresee negative consequences for further economic growth. One way or another, the woman with a great experience of life, in the economic field in particular, took the helm of the Fed.
Janet Yellen and the “quantitative easing” (QE) program are inseparable. Some experts say it was Ms Yellen who offered this crucial project. However, this program has already become a sticking point for many experts who are pessimistic about its continuation. The ascension of Yellen worsens this sentiment as she keeps saying that the stimulus measures will not be tapered until the economic conditions become better and the US economy shows steady growth.
It is only fair to add that the asset purchase program brought positive changes. For instance, the US stock market found the road back to positive territory, and the national currency started strengthening versus the European counterpart. Nonetheless, the situation should be viewed objectively. QE3 is gradually becoming a kind of a drug for the American economy, and the withdrawal of it will cause stagnation at all levels.
Even Janet Yellen understands the program cannot last forever as it will create grave risks for the financial stability. She believes it is very important not to go too far and keep it in proportion: QE is to be wound down not too early and not too late. The central bank has already started tapering, but it is still far away from the finish.
The new Fed’s head has emphasized earlier that the government has no certain plans on scaling back the quantitative easing. In other words, the vessel will drift across the ocean until it reaches the shore. The economic situation should be monitored daily. QE cannot be abandoned until there are clear signs of progress. So far, the economic growth pace has been vastly disappointing.
Undeniably, the current stock market dynamics is a bright sign, but a high unemployment rate raises fears around the health of the US economy. Janet Yellen will struggle hard with unemployment. The modest inflation causes concerns as well. And, according to the Fed’s Chairwoman, this is the major proof that it is too early to taper the stimulus measures.
However, this medal has a reverse side. Yellen’s opponents say that the dovish policy of the central bank inflates the debt bubble in the world market that undoubtedly will affect the global economy.
In any case, Janet Yellen has only few options to act. Of course, she can announce an immediate trimming of the QE3 program, and the aftermath of this action is easy to predict. Any abrupt move has drastic consequences for the economy.
The other possibility is gradual scaling back of the stimulus, which will be followed by another similar project, and the economy will be able to see short-term improvements further.
For sure, Janet Yellen does not favor tough and radical steps. She is used to acting prudently, thoroughly estimating all probable consequences of every movement. “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” Ms Yellen said. That means the Fed will not surprise the world community in the nearest future.