Janet Yellen’s nomination to lead the US Federal Reserve may signal a reprieve for Asian economies and emerging markets from any immediate reduction of stimulus that could roil markets and capital flows.
Emerging market stocks plunged in May when chairman Ben Bernanke signalled that stimulus measures might be pared, then rebounded when the Fed retained the measures unchanged last month.
If the Fed pulled the rug from beneath Asian markets, “it could clearly lead to some nasty repercussions”, said Frederic Neumann, HSBC Holdings’s co-head of Asian economics in Hong Kong. “But Yellen is seen as somebody who might withdraw stimulus only gradually.”
The concern of emerging markets is that when the Fed does begin tapering its bond buying, it could hurt them by sparking an exodus of cash. Brazil, Turkey, South Africa, India and Indonesia were the most vulnerable, Goldman Sachs strategists said in a report last month.
US President Barack Obama was scheduled to announce the nomination in Washington yesterday afternoon. If confirmed by the Senate, Yellen would succeed Bernanke, whose second four-year term ends in January.
“She has rich experience and an impressive résumé as a policymaker,” said Choi Hee Nam, a director-general in the South Korean finance ministry. “I expect her to consider well the ripple effects on other countries [from policy decisions].”
Li Daokui, a former People’s Bank of China adviser, said Yellen’s appointment meant there would be a “prolonged period of appreciation” for the yuan as additional hot money flowed into China.
That would deepen a monetary policy dilemma over whether to lower interest rates or to gear policy more towards fighting inflation, Li said.
Cao Yongfu, a researcher in the Chinese Academy of Social Sciences, said Yellen’s nomination would help soothe China’s short-term concerns that an immediate tapering of Fed bond buying would cause volatility in capital flows.
Even so, prolonged easing under Yellen might result in dollar depreciation and undermine the value of China’s foreign exchange reserves, Cao said. “Yellen’s big challenge will be to shift Fed policies back to normal from an ultra-loose stance – you can’t always keep your foot on the gas.”
Yellen won the nomination after former Treasury secretary and White House economic adviser Lawrence Summers withdrew from consideration when Democrats on the Senate banking committee expressed opposition to his candidacy.
As Fed vice-chairwoman since 2010, Yellen has articulated the case for maintaining highly accommodative monetary policy. In a series of speeches last year, she outlined why interest rates could remain near zero into late 2015, and in 2011 she justified the Fed’s first two rounds of large-scale asset purchases with an estimate that the programmes would create 3 million jobs.
Yellen is not among the Fed policymakers who have pressed this year to pare back asset purchases. – Kevin Hamlin and Cynthia Kim in Beijing and Seoul for Bloomberg