What’s to Come in the Yellen Years?

01.13.2014

As of January 6, 2013, Ben Bernanke’s successor has been officially identified as Democrat Janet Yellen. While Bernanke’s reign slowly dwindles to its end (approaching briskly on January 31), currency traders turn their attention to learning more about Yellen and what she might do with her time in office. According to the National Journal, every Federal Reserve board chairman comes into office with a secret agenda or a hidden passion that will drive all of their decisions while they serve. As wise investors seeking to identify what Yellen’s next move will be and how this might affect the currency markets, we must look deeper into what her political background has shown us thus far.

Hailing from the fine economic school of Yale University, this 67-year-old economist has a track record for being honest and open, leaving no secrets about where her attention lies. An active political player, she has served with President Bill Clinton’s administration, as the CEO and President of the Federal Reserve Bank of San Francisco and as the Vice Chairwoman of the Federal Reserve. She has been known to follow nothing but the facts. As you may have guessed, this makes traders and Americans alike wonder, what will she do with the fact that the U.S. has agreed to start scaling back on the mounting quantitative easing? Now that the easing has begun, how she handles the need to continue economic growth in the U.S. as the easing subsides could lead traders to alter their U.S. dollar trades dramatically. In the past, she’s devoted her career to identifying causes of market failures and how strategic government intervention can be used to nudge (and at times shove) economies back on track. This concept, coupled with her attention to the still evolving field of behavioral economics, has some traders expecting that in the coming months, she will pay close attention to the amount of debts piled up for the country and how to elicit a steady uptick for the still shaky economic situation in the U.S. even if government intervention is the likely remedy.

The FOMC successor plans to bring the U.S. economy back to life according to the National Journal’s article on the matter. If she succeeds in raising faith in the U.S. economy, U.S. dollar traders can expect a strengthening across many USD pairs, but her ability to do this has yet to be confirmed. If the economy continues its growth trend and unemployment rates continue to improve, that should create trust in Yellen from U.S. investors and traders alike.  This year could see a large increase in the value of the U.S. dollar against other currency crosses and a consequent change in the USD Index which many Forex traders utilize in strategically planning USD-related trades.  On the other side of that coin, any setback during Yellen’s time in office could spur the opposite to take effect.

Now that Yellen is confirmed, all eyes will be on the first female chief of the nation’s central bank. Speculation says that her first big test in office will be here sooner rather than later as the debt ceiling decision is raised to the forefront in the coming weeks leading up to February 7, 2014.  The unemployment and early 2014 Non-Farm Payroll reports will also have an impact as to how she starts her leadership as Chairman of the U.S. Federal Reserve.  It will be interesting to see how the first Democrat to lead the Fed since 1987 handles the pressure.