Yellen, Bernanke’s QE Heir

Yellen and Bernanke

It’s official now that the White House wants Yellen to be the head of the U.S. Federal Reserve and Bernanke’s successor. That was an interesting thought as she have much in common with the Bernanke, and she is the one to inherit the QE program problems and the debt ceiling issue. Gold price benefited from both concerns for the past 8 years and rallied to historical levels. Yellen might be a typical heir to Fed throne and Bernanke’s legacy, and might not.

Despite the personal commons such as religion or untraditional appearances (a bearded man in 21st centaury then an albino), both are democrat doves. Both advocate the QE program to the far end till the U.S. economy recovers. However, Bernanke left a heavy burden for his heir; the number of jobless claims hasn’t reached an acceptable number yet despite the ultra-easy monetary policy, and the GDP annual growth rate hasn’t reached the desired 2% yet. Maybe the QE wasn’t the answer to the U.S. recession after all. But Yellen should have what it takes to make things right.

Since the start of QE3 in September 2012, gold lost a considerable amount of its value despite the concept itself should be bullish for gold. This outcome might change in Yellen’s time, especially if the U.S. hit the debt ceiling and the political debate in Washington didn’t resolve. The current government partial shutdown also had its toll on the U.S. economy; it pushed expectations to have good economic data numbers to start tapering till 2015. That’s another bullish environment for gold, which might not be taken advantage of as in 2012.

Moreover, the U.S. government and Congress should discuss the debt ceiling issue, as the states will hit it on October 17. Analysts expect a short extension of the deadline, which adds more weight on Yellen’s shoulder in taking decisions. Worst case scenarios is Yellen resigns after few months and the U.S. government defaults if no encouraging results emerges and the political tension reach the boiling point. Nevertheless, it’s very, very unlikely to happen, so rest assured. That scenario is the most bullish for gold and other raw commodities. However, it will result in a disaster and meltdown in our contemporary economic systems.

Another scenario is she changes into a hawk, and start hitting the brakes sooner than expected. As Bernanke and almost every analyst said, ending the QE program too early will only damage the economy even more. This too is unlikely to happen, as Yellen knows the dangers of such move the best.

Either way, Yellen is well-known to be a reactive member of the FOMC. She will do what she sees as the best decision and accommodate to the economy’s numbers. That might be the reason why the White House chooses her to be Bernanke’s successor; she is both flexible and reliable. Now it’s up to the Congress to approve her new position.

Ben Bernanke still has 3 sessions as FOMC head before Yellen take over. He might ease the burden on her and start tapering giving her a breather and a chance to maneuver. Yellen will enter her office in a very tough time, and I don’t envy her. The situation needs drastic measures to repair the damage done to the U.S. economy, but no one knows the right answer. As for gold, it’s becoming crazier as the market volatility is something alien to the safe-haven yellow metal.

Yellen might have many commons with Bernanke, but that doesn’t necessary means the economy will react the same way to her decisions. There are too many variables and too many problems were delayed. These problems might surface now, or remain running in the background for a little while longer. Now, all we can do is to cross our fingers and hope for the best.