One American portfolio manager would have been speaking for many in the financial markets when he said: "Thank God (Janet) Yellen will be nominated". This is not because any other choice to run the US Federal Reserve would have been unthinkable, but because a radical change right now might have unnerved markets amid a political stalemate in Washington and the risk of a debt default. Yellen, deputy to outgoing chairman Ben Bernanke, is an advocate of Bernanke's aggressive action to restore healthy growth to the US economy through low interest rates and large-scale asset purchases. She therefore represents continuity. She is the right choice, when a premature withdrawal of stimulus could derail a hesitant recovery. That said, she faces early challenges, because she will be taking over against the background of division on the Federal Open Market Committee over when to begin tapering its US$85 billion-a-month bond-buying programme. The surprise decision not to taper last month rallied financial markets and reversed a flight of capital from emerging economies.
In the wake of the global financial crisis, critics tend to scrutinise candidates for top policy positions to see if they read danger signs. Yellen anticipated the scale of the problems inherent in subprime housing mortgages because she understood that their involvement in complex derivatives had turned them into toxic time bombs which, in the event of a house-price slump, could destroy the confidence of lenders and prompt a freezing of credit markets.
President Barack Obama's choice of Yellen matters to Hong Kong because of our currency peg, which means that our liquidity conditions and interest rates reflect those in the US. Her support for ultra-loose monetary policy to help reduce unemployment, so long as it does not fuel inflation, will support Hong Kong property prices at high levels. Economies so intimately affected by the Fed's decisions have Yellen to thank for moving the Fed towards more clarity in its communications, including the adoption of an explicit inflation target.
When she takes over next year the timing and pace of tapering of the US' loose monetary policy may still be the big issue. In an analysis by The Wall Street Journal of the accuracy of predictions by senior Fed officials in the past four years, Yellen outshone 14 others. Markets and emerging economies will be hoping she has not lost her touch.