US smashes a glass ceiling

THERE are all sorts of reasons for applauding the choice of Janet Yellen as the next chairman of the Federal Reserve, the most important job in global finance.

She will be the first woman in the role and will earn her place in the history books.

at 67 she is an elder statesman of economics and demonstrates america is a place that still values experience over youth. and as vicechairman she gives real hope to the idea that there can be succession policy at central banks.

It was important for President Obama to do something because the vacuum over the Fed succession was yet another uncertainty for markets that are being roiled by the incompetent handling by the White House and congress of the government shutdown and the impending crisis over the debt ceiling – the amount the US government is allowed to raise on financial markets.

Equity investors know that uncertainty is the greatest enemy of financial confidence and with the Yellen appointment Obama takes that off the table. It may, however, be too simple to see Yellen as a Fed apparatchik who will just go the Bernanke way.

For a start, the Brooklyn-born economist comes from a Democratic background having worked in the clinton White House. Indeed, she will be the first Democrat to be in charge of the Federal Reserve for three decades. The last to hold the post, Paul Volcker, turned out to be a radical, who reshaped the way the central bank did business and showed a willingness to take the toughest decisions, such as putting a surcharge on credit cards.

Yellen will take over at a critical time for the Fed with tapering, the run- down in quantitative easing, looming along with the normalisation of interest rates.

The assumption is that US official interest rates will not start to rise until 2016, although the markets have the dial set on the summer of 2015. The consequences of ‘normal- isation’ are set out alarmingly in the International Monetary Fund’s global stability report just issued.

It suggests the capital losses on global bond portfolios, the prices of which have been held artificially high by low interest rates and QE, will be $2.3trillion. That could be every bit as big a shock to international investors as low interest rates have been on annuity incomes.

Supporters of Larry Summers, who was until recently the favourite to run the Fed, will see Yellen as a second-best candidate forced on an indecisive White House by an obstreperous congress.

But no one should diminish Yellen’s career. It has included spells in government, academic excellence at the London School of Economics and Berkeley and her connections to an economic aristocracy.

Her husband, George akerlof, won the 2001 Nobel prize in economics. Son Robert is also a renowned economist. and for the first time in economic history the head of both the IMF, christine Lagarde, and the Federal Reserve will be women.

The hope must be that it will usher in a calmer and more collegiate approach to global economic decision-making.

Sharper tools

IT is a rare occasion when Britain escapes criticism from the International Monetary Fund.

The most worrying aspect of its global stability report must still be Europe and the failure, so far, of banks in Spain, Italy and Portugal to recognise fully the corporate losses that amount to up to 20pc of their loan books.

But as far as the Uk is concerned, it is the fear of a new housing bubble that caught the eye. The Fund’s experts note with some concern that it is slightly unfortunate the launch of the second phase of the ‘Help to Buy’ scheme, the bit that provides mortgage subsidies on homes up to £600,000, coincides with an already sharp increase in house prices.

Far from helping affordability, it believes the risk will be that it will put more accommodation outside the range of those who need it, thus diminishing supply. The IMF thinks chancellor George Osborne should expand the toolbox available to the Bank of England by giving it powers to impose loan-tovalue restrictions on the banks. That was something Mervyn king’s Bank of England backed away from amid coolness at the Treasury.

Now it returns to the agenda.

Helicopter Ben

BRITaIN is not the only country to be experimenting with new banknotes.

The US, which has a curious attachment to old ways (it still weighs in pounds and fills up in gallons) has, after three years of study, introduced a new $100 banknote.

It will still bear the image of Benjamin Franklin but there are high-tech changes including a colour- changing hologram that contains the Liberty Bell.

Franklin also gets a textured jacket, but for the moment no plastic and no maple syrup or fish-and-chips odour.

as a starter the Fed has stockpiled 3.5bn of its new $100 bills in its regional branches.

all it needs now is the helicopter.