25 Oct 2013

Which way will new Fed chair take US economy?

12:49 pm on 25 October 2013

A US business professor says the American economy is in uncharted territory and no one knows which direction the new chair of the US Federal Reserve will take it.

Alan Beckenstein says one of the biggest challenges faced by Janet Yellen will be deciding when to dial back monetary stimulus.

"There's a concern there that they won't go back to fundamentals," he says, "and the exit strategy from the monetary policy that's been applied for the last four years or so is poor - there's no good exit strategy."

The world's most powerful central bank has been effectively printing money since late 2008, most recently buying $US85 billion worth of bonds a month, in order to keep interest rates artificially low and generate easy money.

Professor Beckenstein - a professor of business administration at the University of Virginia's Darden School of Business - is also the faculty leader of the Ernst & Young executive programme in New Zealand and has visited regularly for the last 20 years working on case studies. That includes spending time at the Reserve Bank, at the Treasury and with companies.

He says Dr Yellen has great experience but compared to Larry Summers (who withdrew from the race for the job) and outgoing chair Ben Bernanke she is perhaps more business-oriented rather than an inflation hawk.

Professor Beckenstein says he believes that if inflation had increased Mr Bernanke would have raised interest rates at that point because academically he was one of the people to invent inflation targeting.

But he says it's unclear whether Dr Yellen would do that.

Her nomination for the job still has to be confirmed by the Senate.