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What will Yellen mean for Canada?

Recently, a meek-looking, grey-haired lady testified before the U.S. Congress, in a bid to become the next chairman of the Federal Reserve Board. If confirmed, Janet Yellen would become the world's powerful woman, with far greater clout than either German chancellor Angela Merkle or Sonia Ghandi, leader of India's Congress Party.

Although hardly anyone outside of tight economic circles knows who Yellen is, her perch at the head of the U.S. central bank, would give her power to guide interest rates, the money supply, regulatory policies and more. Her indirect reach would extend even to the Canadian housing sector, which should benefit from upwards pressures stemming from Yellen's reputation as a "dove," who will continue asset inflation policies initiated by predecessors Ben Bernanke, and Alan Greenspan.

These include a near-zero policy interest rate, coupled with nearly a trillion dollars a year in bond purchases, which are meant to stimulate economic growth through the "wealth effect." The thinking is that if people feel richer because their stocks and house prices are rising, they will spend more, which should create jobs in the businesses that produce goods and services.

Job creation and the economy look good
This unprecedented loose U.S. money has been just barely keeping the economy afloat, a trend that continued during the past several weeks. Here, job creation proceeded at a steady pace during October, according to Statistics Canada's Labour Force Survey. Employment rose by 13,200 posts, though the unemployment rate remained unchanged at 6.9 per cent. The U.S. created 204,000 jobs during the month, with the unemployment rate coming in at 7.3 per cent.

Yellen's testimony, which drew almost unanimous plaudits from all quarters, gave strong indication that she will try to ensure that trend continues.

That said, seasoned political watchers likely noticed two disquieting things about Yellen's Congressional performance. The first relates to her comment that the Fed was not a "prisoner of the markets," which she made when explaining why the central bank backed away from plans to trim its money printing.

Those "tapering" hints by Ben Bernanke, the current Fed chair, caused equity markets to tank and long-term bond yields to spike by almost 1 per cent. Stock markets, however, quickly shot up to record highs, after the Fed backed away from its stance.

In hockey, the surest sign that a coach is about to be fired comes when his boss assures everybody his job is safe. In a similar vein, Yellen's comments regarding the Fed's independence from markets have refocused attention on just how often the weakened central bank, which is gradually running out of tools, is increasingly forced to follow events, as opposed to leading them.

The second worrying signal can be seen if you watch Yellen's testimony with the sound off. Experts say that 90 per cent of communication is non-verbal. That means watching a person's body language tells you more than what they are actually saying. In Yellen's case, what comes across is a poised, intelligent and extremely competent individual -- that is, until you look at her eyes, which look like those of a deer caught in the headlights.

Market players are hoping that Yellen's nervousness relates to the pressures of her testimony, not to worries she may have as to the challenges ahead.

Peter Diekmeyer is Bankrate.ca's economics columnist. He can be reached at peter@peterdiekmeyer.com

-- Posted November 25, 2013
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