* Bond-buying reduction offers roadmap for Yellen
* More hawkish voters on monetary policy next year
* Dialing down stimulus could help maintain Fed consensus
By Ann Saphir and Jonathan Spicer
SAN FRANCISCO/NEW YORK, Dec 20 (Reuters) – By ensuring the
Federal Reserve begins trimming its massive bond-buying stimulus
before a more hawkish contingent of voters comes on board next
year, Fed Chairman Ben Bernanke has greased the skids
politically for his successor, Janet Yellen.
The U.S. central bank’s decision on Wednesday to begin to
cut the pace of its monthly purchases by $10 billion, to $75
billion, gave the Fed’s bond-buying skeptics what they wanted: a
roadmap out of a policy they felt risked fueling future
inflation.
Barring an unexpected downturn, Bernanke told reporters at
his last news conference as chairman that the central bank would
likely end the bond-buying by late 2014.
The delicate policy change effectively shifts the Fed from
an era of extraordinary stimulus to one of slowing the money
presses and eventually starting to shrink the central bank’s
nearly $4 trillion balance sheet.
For Yellen, it could neutralize potential opposition from
regional Fed presidents who opposed the stimulus program and who
rotate into voting spots on the Fed’s policy panel next year,
giving her some breathing room to acclimatize.
“She’ll now have a clean policy slate – she won’t have to
worry about making her first policy decision be to taper,” said
Millan Mulraine at TD Securities. “It will be a much easier
regime for her, because it’s now a matter of steady-as-she-goes
policy.”
The Senate is expected to hold a test vote on Friday and a
confirmation vote on Jan. 6 to hand Yellen the reins at the Fed
after Bernanke’s second four-year term as chairman expires on
Jan. 31.
Financial markets, ever sensitive to the utterances of the
Fed chief, could be especially jittery as investors get used to
Yellen’s style of leadership and communication.
Further complicating things, at least three seats at the
seven-member Fed board will need to be filled in the new year,
presuming Bernanke steps down when his chairmanship ends, as is
widely expected.
Back in May, the mere hint from Bernanke that the central
bank could soon start to slow its bond buying sent bonds and
stocks into a tailspin. Long-term borrowing costs rose so
quickly that the Fed had to put its plan on hold and redouble
efforts to convince markets that interest rates would stay low
for a long while even if the purchase pace slowed.
This week’s decision reduced such headaches.
“I do think the decision … will help ease the transition
for the new chair,” said Jack Ablin, chief investment officer at
BMO Private Bank in Chicago. “This was a step in the right
direction.”
HAWKS GAIN CLOUT
Dallas Fed President Richard Fisher and Philadelphia Fed
chief Charles Plosser rotate into voting slots on the
policy-setting Federal Open Market Committee next year.
Both have been vocal opponents of the bond-buying program,
and both have a record of expressing their opposition to
policies in the form of dissent.
In addition, Cleveland Fed President Sandra Pianalto, who is
usually seen as a centrist but who wanted the Fed to scale back
its purchases earlier this year, also takes a voting spot. While
she has announced plans to step down early in 2014, she has said
she will serve until a successor is named.
Admittedly, another vocal hawk – Esther George of the Kansas
City Fed – loses her vote, and is replaced by dovish Narayana
Kocherlakota of the Minneapolis Fed.
But taken together, the ranks of officials who would prefer
to normalize policy sooner rather than later will have their
hands strengthened.
They can be counted on to keep the pressure on Yellen to
stick to the timetable Bernanke laid out. As long as she does,
outright dissent is unlikely.
To have already begun the process of tapering asset
purchases “takes the heat and pressure off Yellen as she embarks
on her chairmanship,” said Scott Anderson, chief economist at
Bank of the West in San Francisco.
POLICY POSTURE
At his news conference, Bernanke emphasized that the
decision on bond buying does not mean the Fed is getting close
to raising benchmark overnight rates, which it has held near
zero since late 2008.
He said the Fed would hold them steady until well after the
unemployment rate falls to 6.5 percent. It stood at 7 percent
last month. That is especially so, he said, if inflation remains
below the Fed’s 2 percent target.
Futures traders took Bernanke at his word, betting there
would be no rate hike until the second half of 2015.
It’s a message that Yellen will continue to hammer home.
“I’m sure she agrees that, given increasingly worrisome low
inflation numbers, that the Fed needs to maintain an
expansionary stance even if it decides to slow down its
portfolio expansion,” said Bob Hall, a Stanford economics
professor. “It can only help her to have this be the Fed’s
posture before she takes over.”
The Fed’s decision to taper has already muted hawkish
sentiment, with Kansas City’s George supporting the Fed’s
decision after a string of dissents at every other policy
meeting this year.
“There was a little bit of a concern that if taper didn’t
start, that you could get a little bit of a tense environment as
Janet started,” said Carl Tannenbaum, chief economist at
Chicago-based Northern Trust.
The more dissents, he said, the less the market may trust
that the Fed will stick with its decisions.
For the wind-down of bond-buying to be a success, he said,
“there have to be as few surprises as possible.”
(Reporting by Ann Saphir and Jonathan Spicer; Additional
reporting by Rodrigo Campos in New York; Editing by Dan Grebler)
