Monday, May 26, 2014

Was Janet Yellen’s Appointment Into Heading the FED Happened at a Very Bad time?

Even though she was the first woman ever to head the US Federal Reserve or FED in its 100-year history is Janet Yellen’s appointment to head the FED happed at a very bad time?

By: Ringo Bones

Even though it was established back in December 13, 1913 with the enactment of the Federal Reserve Act in response to the series of financial panics – particularly the severe “panic of 1907”. In its 100-year history, no women had ever assumed command in leading the FED until now. Though the announcement came back in January 6, 2014 by President Obama that Ben Bernanke will be replaced by Janet Yellen – the first woman ever to head the US Federal Reserve – in its 100-year history Although she won’t be doing her duties until sworn in on February 3, 2014 after it was earlier announced, was Janet Yellen appointed into what will be a very bad time for the FED?

Even though a majority of senators approve of the president’s appointment of Yellen because she’s an advocate of the quantitative easing that started back in 2008 that prevented the collapse of America’s major financial institutions, Yellen plans to taper back the stimulus from 85 billion US dollars a month to 75 billion US dollars a month. Sadly, this is the very measure that made her appointment to head the FED “at a very bad time”.

From 2010 to 2013, the net worth of the word’s bond borrowing market was worth 999 billion US dollars when the FED’s economic stimulus package was still in full swing. When Janet Yellen takes over the FED by February 1, 2014 and the economic stimulus tapered down, this would mean that the net worth of the world’s bond borrowing market will start to worth a little less over time. Sadly, tapering down the FED’s stimulus package by 10-billion US dollars is no financially trivial matter devoid of consequences
Emerging market policymakers are now starting to blame the FED because its economic stimulus package had made their respective economies addicted to cheap borrowing costs – i.e. low interest rates – that an abrupt tapering off would result in an economic hard landing for emerging economies around the world. And thus emerging market policymakers started blaming the US Federal Reserve for its short-sightedness that made them too dependent on cheap borrowing costs.

But International Monetary Fund managing director Christine Lagarde says that emerging markets should have “first put their houses in order” and plan for the future given that cheap borrowing costs from the FED will someday end. Because of this the FED’s tapering of their economic stimulus – however gradual – will surely have an impact on the currencies of emerging markets - primarily affecting the purchasing power of the low to middle class citizens.  

Since the FED’s economic stimulus began, established companies in the United States and the European Union had been heavily using this cheap money to invest in emerging economies and those “poorer countries” neighboring those emerging economies. And this reached its peak back during 2010 to 2013. Looks like Janet Yellen – like President Obama – had assumed her post at a really bad time indeed, despite Yellen being the first woman ever to head the FED in its 100-year history. Hopefully, Yellen has been known to “thrive in adversity” when she was still serving as the vice chair of the FED under Bernanke from 2010 to 2014.