The Senate’s overwhelming vote to approve Janet Yellen on Monday to become the next chair of the Federal Reserve puts the U.S. central bank on a path to maintain its easy-money policies but leaves unanswered questions about the long-term risks of such unprecedented intervention.
Conservatives warn about the central bank taking on trillions of dollars in new liabilities through its aggressive bond buying, while progressives champion her ascension to the Fed’s top post after current Chairman Ben Bernanke’s second four-year term ends on Jan. 31. What seems clear is that investors have become accustomed to the Fed’s activism and responded positively, as the Standard & Poor’s 500 Index rose 29.6% in 2013 for its biggest yearly gain since 1997.
With the Fed’s plan to taper its monthly bond purchasing from $85 billion to $75 billion this month, it is unpredictable how the markets will react as the central bank further scales back its monetary stimulus. Another worry is that the Fed’s policies also are bloating the central bank’s balance sheet with huge liabilities.
“Since 2008, the Federal Reserve has held interest rates near zero and quadrupled its balance sheet to $3.9 trillion,” said House Financial Services Committee Chairman Jeb Hensarling, R-Texas. “It has, in many ways, served as an enabler to the Obama administration’s failed economic policy through an unprecedented campaign of monetary stimulus with three massive rounds of bond buying — a campaign described by one former Fed official as ‘the greatest backdoor Wall Street bailout of all time.’”
