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Jan 6, 201411:15 AMOpen Mic

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What will the new Fed chair mean to investors?

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President Obama has nominated Janet Yellen, the current vice chairwoman of the Federal Reserve, to become chairwoman of the Fed when Ben Bernanke, the current chairman, ends his term on Jan. 31. What does her appointment mean to investors?

Many experts think that Yellen is likely to continue the policies favored by Bernanke, such as a determined effort to keep short-term interest rates at historic lows until the unemployment rate drops to about 6.5% — which may not occur until 2015. Consequently, if you invest in short-term bonds or certificates of deposit (CDs), you may not be seeing significant changes in the rates you receive.

The Fed has less control over long-term rates, but in an effort to stimulate the economy, it has attempted to keep these rates low by purchasing about $85 billion in bonds — a mix of Treasury bonds and mortgage-backed securities — each month. Although Yellen has supported this program in her role as vice chairman, it’s unclear how much longer the bond-buying will last and, in fact, it may even be reduced before she takes over as Fed chair.

If this happens, you will want to pay close attention to your long-term bonds, or bond-based mutual funds, because if long-term rates go up, the value of your bonds will drop, perhaps sharply, because no one will want to pay full price for your bonds when they can purchase new ones at higher rates. Consequently, you may need to adjust this part of your portfolio.

The Federal Reserve’s ability to adjust interest rates in response to economic growth and inflation attracts a lot of attention. But the Fed also helps to regulate our overall financial system — a role that has gained increased importance since the financial crisis of 2008.  Yellen’s background and philosophy offer some clues as to how she might approach this aspect of her Fed leadership. She has strongly advocated the idea that proper regulation can help prevent abuses in the financial markets, thereby contributing to fewer disruptions.

Yellen has been a good prognosticator. She warned about the housing bubble well before it occurred, and she correctly predicted the somewhat slow recovery from the financial crisis and the accompanying low inflation.


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