Rumors and leaks coming out of Washington indicate that President Obama is set to nominate Janet Yellen as the next Fed chief as Ben Bernanke is stepping down at the end of his current term. She is in an unenviable position by having to come into an economy recovering but still reeling from crisis.
How does Janet Yellen impact your investments? Any time there is a change at the top of an organization, you can expect some changes. In this case, the organization is critical to the economy (meaning they could really screw up the economic recovery!) The obvious impact is in the area that has been at the forefront the past several months: Quantitative Easing and the economic recovery.
Bloomberg News put out this infographic showing Janet Yellen’s work history. She is know as a thoughtful researcher. She believes in tougher financial regulation, aggressive policies to stimulate economy, and she values transparency. The chart below illustrates three schools of thought on fiscal policy and shows how her believes compare to other approaches.
Investors believe she will advocate the Fed push to keep rates low even longer, erring on the side of creating bubbles while creating jobs and stimulating the economy.
I don’t feel qualified to weigh in on whether or not she is the correct pick, I am just looking at how it impacts the investment models I manage. On the fixed income side, I will sticking with the shorter duration bonds positions that we’ve invested in. Unless the Fed announcing a change, I believe they will continue on a path very close to what they’re doing now, which means higher interest rates as the economy improves. On the equity side, I expect the QE tailwind to retain intact. (Some talking heads/financial news pundits have said they believe the markets are overvalued and getting bubbly, but I’m not there yet.)
For me, I hope the Fed’s decision to be more transparent will remain with the Fed Chair transition. If they continue to communicate what data they are reviewing and what their thoughts are on the economy and quantitative easing, it will be easier for investors to understand the timing of changes that could impact portfolios.
UPDATE: President Obama just officially nominated Janet Yellen