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FACTBOX-Yellen on rates, regulation, communication revolution

Friday, 20 Dec 2013 | 12:02 PM ET

Dec 20 (Reuters) - Janet Yellen cleared a key Senate procedural hurdle on Friday that all but assures her place as the next chair of the Federal Reserve as it begins to map its way out of unconventional policy territory.

The Senate voted to move forward with Yellen's nomination, and final approval is expected on Jan. 6.

The U.S. central bank has held benchmark interest rates near zero for five years and quadrupled its balance sheet to about $4 trillion through three massive bond-buying programs.

As those efforts turn the tide on jobs, Yellen, 67, is expected to extricate the Fed from its super-easy monetary policy, first by managing further reductions to the massive bond-buying program and, eventually, by raising rates from rock-bottom levels.

Her approach to that delicate task will be informed by views shaped through decades of policymaking and research. A snapshot of those views follows:

JOBS

Yellen, as the Fed's vice chair since 2010 and the chief of the San Francisco Fed before that, has helped shape the Fed's ultra-easy monetary policy. She is not shy about her belief, at odds with some of her more traditionally-minded colleagues, that the Fed can do a lot to alleviate unemployment.

In a speech on March 4, she said that progress in the labor market should "take center stage" in monetary policy.

"I consider it imperative that we do what we can to promote a very strong recovery," she said at her confirmation hearing last month. "We're doing that by continuing our asset purchase program, which we ... put into place with the goal of assuring a substantial improvement in the outlook for the labor market."

INFLATION

Yellen believes that it is rare for the Fed's two goals - maximizing employment and keeping inflation low and stable - to conflict. But when they do, she said in 1995, "a wise and humane policy is occasionally to let inflation rise even when inflation is running above target," if doing so allows the Fed to bring down unemployment more rapidly.

Given her stance, some critics worry Yellen could let inflation spin out of control. But her credentials also suggest she will be keeping a watchful eye. In 1996, she urged then-Fed Chairman Alan Greenspan to consider raising rates to head off inflation, and just as she has never dissented on a rate-cutting decision, she also has never withheld her support in a vote to raise rates.

QUANTITATIVE EASING

Yellen has backed bond-buying, saying its benefits exceed its costs. She voted, however, in favor of the Fed's Dec. 18 decision to modestly trim the pace of its monthly bond purchases, by $10 billion to $75 billion.

"There are dangers, frankly, on both sides of ending the program or ending accommodation too early," Yellen told senators last month. "There are also dangers that we have to keep in mind with continuing the program too long or more generally keeping monetary policy accommodation in place too long."

FORWARD GUIDANCE

The Fed is trying to keep downward pressure on long-term borrowing costs by promising not to begin raising overnight rates at least until the unemployment rate drops to 6.5 percent, provided the outlook for inflation remains under 2.5 percent.

It tweaked that pledge on Dec. 18, saying it likely would be appropriate to keep rates near zero "well past the time" that the jobless rate fell below 6.5 percent, especially if inflation expectations remained below target.

The jobless rate in November was 7.0 percent.

A recent paper by senior Fed staff economists argued in favor of lowering the unemployment threshold to give further impetus to the recovery.

Yellen has not tipped her hand on whether she thinks the Fed should lower it, but she has suggested rates could stay low regardless.

"(T)he thresholds are not triggers - that is, once a threshold has been crossed, the (policy-setting) committee will not necessarily raise the federal funds rate target immediately," she said in a letter to a senator last month. "Monetary policy is likely to remain highly accommodative long after one of the economic thresholds for the federal funds rate has been crossed."

ASSET BUBBLES

One criticism of the Fed's ultra-easy policy stance is that it could inflate another asset bubble. Yellen has consistently shot down those concerns.

Still, she has hinted at a more muscular approach to regulation and the possibility she would support using monetary policy if needed to keep bubbles from destabilizing the financial system.

"I absolutely believe that our supervisory abilities are critical, and they're just as important as monetary policy," she told senators. "I would not rule out using monetary policy as a tool to address asset price misalignments, but because it is a blunt tool ... I would like to see monetary policy used first and foremost towards achieving those goals Congress has given us, and to use other tools in the first instance to try to address potential financial stability threats."

TOO BIG TO FAIL

Yellen believes that policymakers are making progress on addressing the problem of so-called too-big-to-fail financial institutions, but wants banks to hold more capital and meet higher liquidity and supervision standards.

COMMUNICATION

In January 2012, the Fed adopted an explicit inflation target, a step that Yellen had long pushed for inside the once-secretive institution. "The challenges facing our economy in the wake of the financial crisis have made clear communication more important than ever before," Yellen said in late 2012, just weeks before the Fed took another big step in what Yellen has called a communication revolution at the Fed: using economic indicators as explicit thresholds for monetary policy change.

Look for Yellen to tweak and expand Fed communications, possibly with more news conferences and more detailed forecasts from policymakers.

(Reporting by Alister Bull and Ann Saphir; Editing by Paul Simao)