A look at the incoming Fed chair and how to read the new tea leaves.

1. Following the Fed
January 29, 2013
Meet the New Boss. Not the Same as the Old Boss
February 1st will mark just the third new Fed Chairman in 26 years. Janet Yellen will be sworn in days after the FOMC
took its second slice off its bond purchasing program due to improving economic statistics (at least that was the
reason given).
As the Fed begins to shift away from tinkering with market pricing and activity, the new Chairman will focus on
"forward guidance" to prompt desired activity in the markets and economy. Basically this means she will tell us when
to expect a shift in rate policy and we are to price the term structure of interest rates accordingly which will affect
financing, consumption, and business decisions in general. We are to believe this will be more successful than QE
which whipsawed the Treasury market at a mere utterance of a possible "taper" last Spring.
Such forward guidance will of course need to be altered as the economy adjusts, implying the Chairman's outlooks will
change as well. For this reason, she will insist we not refer to them as "predictions" because, as every economist
knows, altering your predictions only works against your own credibility.
Proverbs tells us it is easier for a rich man to get into heaven than for a camel to fit through the eye of a needle. A
similar comparison might be made to the challenge now facing Dr. Yellen.
If she can pull it off, I suggest immediate retirement to the speaking circuit. If not we will have discovered yet another
life-long academic who is simply as human as the rest of us.
What’s Important…
Janet Yellen will be sworn in as Fed Chairman on February 1st. Dr. Yellen has spent many years working inside the
Fed as a Fed Governor, President & CEO of the San Francisco Fed, and finally as Vice Chair under Bernanke. This
will make for a "smooth" transition in the initial stages, but soon she will have to make her own mark. Today it looks
like this will come with a focus on "forward guidance" as her primary tool for monetary policy.
Expect greater focus on the employment market, especially its make-up between full- and part-time positions. Much of
Janet Yellen's economic research has been focused on the jobs market and there is a great need to revive healthy job
growth. Though she believes the Fed can have a strong effect on the jobs market, I remain skeptical given how much
monetary stimulus has already been put into place.
Stanley Fischer will soon be sworn in as Vice Chair and could be a significant distraction for Yellen. Fischer formerly
headed up the central bank in Israel and has been a mentor over the years for Bernanke, Mario Draghi (the head of
the European Central Bank), and Larry Summers (who Dr. Yellen beat out for the Fed job). It is not clear why
someone of his stature would take the number two position at the Fed and how his relationship with Yellen may affect
market perception. Will she be able to use him properly to communicate with the markets, or will he prove a thorn in
her side?
Yellen's "forward guidance" is now the focus. "Forward guidance" is just a fancy way to say the Fed will communicate
its intent regarding future interest rate moves so the market can discount them and adjust accordingly. Since it does
not involve any direct market manipulation – like QE – the potential side effects are minimal. Either the markets will
believe the Fed or they won’t. The trick for Chairman Yellen and company will be to send a cohesive, decipherable
message about future interest rate levels. Bernanke stumbled last Spring when indicating a possible "taper" on the
horizon which sent interest rates up 100 basis points even though the Fed's actual purchases remained unchanged. It
will be interesting to see if Yellen can be more successful by focusing solely on communications rather than actual
market activity.
© 2013 SVB Asset Management.SM All rights reserved. Rev.08.2013

2. Following the Fed
January 29, 2013
What to Look for…
The Fed will continue to taper at each upcoming FOMC meeting (about every six weeks), until QE is finally wound
down late next summer. Also, they will immediately reduce their emphasis on QE as an effective policy tool in favor of
"forward guidance" of future interest rate targets.
Meanwhile, it is likely the economy continues to inch forward, improving steadily though disappointingly early in the
year. Though challenges are on the horizon in China, Japan and Europe, the U.S. looks to be experiencing some
consistency regarding consumer activity, the driving force of the overall economy.
A Picture is Worth…
As the Fed has expanded its balance sheet, so has it expanded the number of words used in the statement that
accompanies FOMC decisions. It should not be surprising that it takes more effort to convey a complex strategy.
However, does this really correlate to a more transparent Fed or does a larger balance sheet and longer explanation
simply promote an air of confusion?
Written by:
Joe Morgan
Chief Investment Officer
SVB Asset Management
@SVBJoeMorgan
jmorgan@svb.com
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or
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© 2013 SVB Asset Management.SM All rights reserved. Rev.08.2013