Obama to name Yellen as next Fed chair on Wednesday

RESPECTED ECONOMIST

A respected economist whose research has taken her deep into theories of monetary policy, Yellen has earned a reputation as one of the Fed officials most worried about unemployment and least concerned about inflation.

"With employment so far from its maximum level and with inflation running below the committee's 2 percent objective, I believe it's appropriate for progress in the labor market to take center stage in the conduct of monetary policy," she said in March.

Yellen studied economics at Yale University and taught at Berkeley for more than a decade before her first stint as a Fed board governor from 1994 to 1997, a post she left to head President Bill Clinton's Council of Economic Advisers.

She later served as president of the San Francisco Federal Reserve Bank, where her first-hand view of the overheated real estate market helped her see the dangers of the housing bubble earlier than many of her colleagues.

Yellen has been central to moving the Fed toward more clarity and precision in its communications, an openness which she sees as the key to an effective monetary policy.

She led a panel of officials who rewrote the Fed's rules on communications and helped convince her colleagues to adopt an explicit inflation target for the first time last year.

Her selection bolsters the credibility of promises the Fed has made about the future course of monetary policy that have been a hallmark of its approach ever since it dropped interest rates to zero in 2008.

Specifically, she could be expected to abide by, if not strengthen, the Fed's stated commitment to keep rates steady at least until the U.S. jobless rates hits 6.5 percent, as long as inflation does not threaten to pierce 2.5 percent. The nation's jobless rate stood at a lofty 7.3 percent in August.

Yellen, who has long argued that the Fed should tolerate slightly higher inflation if that is the cost of fighting high unemployment, has never dissented on a Fed policy decision.

But she also has not shied away from advocating rate rises if she feels the situation calls for it. In 1996, after then-Fed Chairman Alan Greenspan had repeatedly put off raising rates, she and a colleague went to him to argue that the central bank was at risk of courting inflation.

EASY MONEY

Her most immediate challenge may be to determine when the Fed should scale back its $85 billion per month bond-buying program. Financial markets had expected the Fed to taper the purchases in September, but it did not and now many economists think it might not move until Bernanke has left office.

Its controversial bond purchases have put the Fed on track to buy some $3 trillion in mortgage and Treasury debt.

The easy money was aimed at digging the U.S. labor market out of the deep hole caused by the 2007-2009 recession.

While it pushed U.S. borrowing costs to record lows and sent U.S. stocks to record highs, the loose policy also fueled resentment in some emerging markets, who had to contend with a flood of hot money as investors sought higher returns.

Now the flood gates are reversing.

The mere mention by Bernanke in May that the Fed could soon begin to ease up on its monthly purchases sent global financial markets reeling and U.S. borrowing costs sharply higher. Currencies and equities in many emerging markets plunged - underscoring the delicate task Yellen would face.

Despite the Fed's aggressive efforts to prop up the economy, growth has been lackluster and the labor market is still sickly.