By Fiona Chan
The Straits Times
Most Asian bourses rose on news that the White House would formalise Yellen’s nomination overnight, a rare spark of cheer amid uncertainty over the US’s government shutdown and looming debt ceiling deadline.
Yellen, 67, will succeed Ben Bernanke, 59, whose eight-year tenure ends on January 31. She becomes the first woman to lead the 100-year-old Fed and the first Democrat to do so since 1987.
Yellen’s nomination was widely expected, especially after front-runner Lawrence Summers, a former adviser to US President Barack Obama, withdrew from the race last month. But the news still gave a fresh boost to spirits in Asia. As Bernanke’s No2 since 2010, Yellen helped craft the Fed’s massive bond-buying scheme and is seen as unlikely to bring it to an abrupt end.
Fears that the Fed stimulus would be reduced, or tapered, in September threw global markets into turmoil over the summer. Asia was especially hard-hit, as the stimulus has fuelled buoyant asset prices in the region.
But the Fed judged that the US economy was too weak to withstand tapering last month. With the US now gridlocked over budget and debt fights, economists believe the Fed will push back its tapering plan further, a schedule Yellen is expected to endorse.
This will give Asian economies – especially those with the weakest fundamentals, such as India and Indonesia – a reprieve to fix their flaws, said Credit Suisse economist Michael Wan.
But for countries such as Singapore, continued stimulus will keep interest rates low and reduce the urgency for households to cut their debt, said Wan.
This could make borrowers more sensitive to macro-economic shocks and may lead to more macro-prudential moves, he said.
Still, with the tapering pace likely to be “more moderate” under Yellen, there may be less volatility in Asian markets when the stimulus is reduced, said UOB economist Francis Tan.
Wu Mingze, a market specialist at forex trading firm Oanda, added that Yellen most likely “possesses intimate knowledge of Bernanke’s plans to strategically exit” the stimulus.
“If markets want a smooth transition, having Yellen is as smooth as it can possibly get.”
Barclays economist Joey Chew noted that Yellen – who has been vocal about improving central bank communication – may introduce an era of clearer messaging from the Fed. This would be welcome as the Fed moves towards normalising its policies, Chew said.
Asian officials were upbeat about the choice of Yellen. Indonesia said it would be positive for financial markets; India said it would buy time to narrow current-account deficits. A South Korean official as saying he expected Yellen to “consider well the ripple effects on other countries” from the Fed’s decisions, while Philippine Finance Secretary Cesar Purisima said the nomination signals stability, policy continuity and a “steady course for the Fed”.