President Obama officially nominated Janet Yellen, currently the vice chairwoman of the U.S. Federal Reserve, to be the next Fed leader after the Jan. 31 retirement of current Chairman Ben Bernanke. The general consensus among Eagle portfolio managers is that Yellen, if confirmed by the Senate, would be a steady influence on fiscal policy in the mold of her predecessor and that her confirmation is likely.
Yellen is a former long-time economics professor and previously served as president of the San Francisco Federal Reserve Bank. Bernanke is an expert on the U.S. Great Depression and used his background to guide the economy through the worst financial crisis since then. Yellen’s academic background may be equally important as the U.S. economy moves through
Here are more specific thoughts from Eagle portfolio managers:
James Camp, CFA, head of Eagle’s Fixed Income programs:
“Yellen is a pedigreed economist and one of the most experienced candidates to be placed in nomination. She is broadly seen as ‘dovish,’ meaning she believes in accommodative Fed policy and its ability to spur the general economy. Her voice already has been heard in recent Fed minutes, including the surprise – to some – continuation of full-on quantitative easing (QE) at the September meeting. Yellen noted that the spike in interest rates since spring was having a significantly detrimental effect on housing so the continuation of QE is seen less as an emergency/crisis tool but, rather, a viable policy to economic targets.
“The more transparent communication of the Fed under Bernanke will continue, if not expand. Yellen has been a major proponent of expanding Fed communications and forward guidance. She is expected to be even more data-driven and model-based than her predecessor. We expect continuation of the zero-bound interest-rate policy on the funds rates and a continuation of monthly asset purchases of nearly $85 billion through the end of this year. All in all, it likely would be a reasonably seamless transition, supportive of risk markets and Treasuries generally.”
Jeff Vancavage, CFA, portfolio co-manager of the Equity Income and All Cap Equity portfolios:
“It became apparent to the market in July that President Obama preferred Larry Summers for the role of Fed chair. A perceived inclination toward tightening monetary policy by Summers – combined with confused communication by the Fed on its intentions – introduced uncertainty into the market in the form of volatile bond yields and a leveling off of stock prices. The president nominated Janet Yellen for the position after Summers withdrew his name from consideration. As a widely respected economist, there is little chance Yellen will not be confirmed and the nomination announcement alone should restore investor confidence.
“As it relates to Fed policy, Yellen will bring continuity to the Federal Reserve’s current low-interest-rate policy. She has been integral in creating the current easing posture and we do not see a major shift in the near to intermediate term. Tapering of quantitative easing could happen early next year and outright rate increases may not come until 2015 or 2016. That will all depend on the progress made in economic growth, the rate of inflation and gains in employment.
“Despite this position, we hesitate to make a blanket statement and throw Yellen in the ‘dovish’ camp. As in the past, we expect her responses to the economic environment to be data-driven and absent of ideology. She appears to be an independent thinker and a strong leader who will take the appropriate action – ‘dovish’ or ‘hawkish’ – at the proper time.”
Betsy Pecor, CFA, and Matthew McGeary, CFA, portfolio co-managers of the Eagle Small/Mid Cap team:
Pecor:“I think we will see more of the same; consequently, the market likely will love her. Yellen is numbers-driven like Bernake – if not more so – and has said that inflation can stay low until 2015.”
McGeary:“Yellen seems like a good choice. She has an exceptional academic reputation and her long tenure at the Fed is noteworthy. Continuity is an important dynamic to maintain in an institution such as the Fed. Markets would not respond well to frequent policy changes. That is particularly true now, given that we are only beginning to emerge from the most significant economic crisis since the Great Depression. Further, the latest dysfunction in Washington is yet another reminder that the market should not rely on the legislative or executive branches of government to enact meaningful fiscal-policy changes. It’s critical to have clarity and consistency right now at the Fed.”
Eric Mintz, CFA, portfolio co-manager of Small Cap Growth:
“Yellen's current ‘dovish’ views toward inflation suggest the Fed will continue ‘Helicopter Ben's’ easy-money policy in the near term. Although her experience suggests she is more than qualified on paper to lead the Fed, the challenge in front of her is significant: the orderly unwinding of the Fed's balance sheet without causing any dramatic moves in interest rates. As evidenced by this summer's ‘taper tantrum’ in the domestic bond and equity markets and – most concerning – also the emerging markets, this daunting task will require delicately managing market expectations. Whether Yellen can comfort the fickle markets that the Fed is capable of unwinding QE without tail risk remains to be seen.”
Todd McCallister, PhD, CFA, head of the Small Cap Core team:
“Yellen is a highly respected academic – one who had a reputation for hearing the other side before making her own case – but one who has not cloistered herself in an ivory tower. She was first to talk about a potential housing bubble (back in 2005) when she served as head of the San Francisco Fed. She was also the first to identify the potential havoc that subprime mortgages – though only 10 percent-15 percent of all mortgages – could wreak on the market, particularly if there were a downtown in real-estate prices.
“Yellen is one of the intellectual authors of quantitative easing, which is not without controversy. She has been right so far in that an enormous expansion in reserves ($2 trillion-plus) has not led to any inflation; however, she is not out of the woods on QE. The interest paid on reserves has caused banks not to lend (the key to a lack of money-supply growth or inflation) but many still worry that the Fed is going to have to sell the trillions of mostly Treasury debt (and some mortgages) at some point. It’s not clear what the market reaction would be to that.
“As others have suggested, she is ‘dovish’ and the Fed’s mid-September decision to delay the ‘taper’ seems to be a Yellen move. Her forecast record, as I mentioned previously, is better than most. Forecasting is a dismal way to make a living but it might be helpful as Fed chairman. This is completely speculative but I wonder if Yellen, sitting in the top post at the time, would have pushed hard to raise rates when she saw the real-estate bubble rising in an effort to stop it early.
“I believe the stock market should like her better than the bond market.”
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