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Bernanke's 11th-hour pivot smoothes path for Yellen

SAN FRANCISCO/NEW YORK -- 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 US$10 billion, to US$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 US$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.

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