Your Money: Reassuring words for investors on Yellen

Posted: October 11, 2013

Now that investors know Janet Yellen is the nominee for chair of the Federal Reserve, they can breathe a little easier. Take it from someone who actually met the nominee.

Terry Sheehan, an analyst with the economic research firm Stone & McCarthy of Princeton, covers Federal Reserve policy and policymakers, the ISM Non-Manufacturing Index, and New York and Philadelphia Fed manufacturing indexes. Sheehan met Yellen last year at a conference and said that not only does Yellen represent continuity in the Fed's low-interest rate and bond-buying policy, but her reputation as a dove is overdone.

"She's ready and willing to increase rates" when the time is right, Sheehan said in an interview. "Overall, Yellen's nomination enables the Fed to stabilize policy even while there's a change in leadership.

"We will see the same general approach to policy," Sheehan said, as under Chairman Ben Bernanke, whose term ends Jan. 31.

Sheehan doesn't see the Fed raising short-term interest rates until at least early 2015. Nor does she expect the Fed to start "tapering" its Treasury and mortgage-bond purchases until December of this year or January 2014 - and likely at a small pace, perhaps $10 billion less in monthly purchases.

Meanwhile, Yellen may not have to worry about inflation kicking in, even given her dovish reputation. (In Fedspeak, hawks worry about inflation; doves generally favor growth, even with inflation.)

Despite the Fed's stimulative policies, the effects on inflation have been muted.

According to Glenmede's Laura LaRosa, the beneficiaries of the Fed's bond purchases - U.S. banks - "have not recirculated the monies through loans to consumers and businesses," and instead have used the capital infusions to cushion their balance sheets.

"As banks are hesitant to lend in uncertain economic times, the Fed's newly 'printed money' remains on the sidelines, thereby dissipating the threat of inflation," writes LaRosa, director of portfolio management. "Only when loan activity picks up and the economy grows will inflation become a risk."

Until then, Glenmede has taken steps in client portfolios to mitigate the potential effects of a rising-rate environment, for example, by shortening duration of fixed-income securities and moving to investments less adversely affected by inflation, such as bank loans and real estate.


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