Yellen (pictured) will take over from current chairman Ben Bernanke next year but will face a difficult unwinding of the Fed's current $85bn a month QE programme.
Current vice chairman of the Fed Yellen was known as one of the more dovish candidates for the top job. It is understood she will accept QE's continued impact but dictate an exit strategy.
Asset manager BlackRock's report The Road Ahead for the Fed said ending the Fed's era of ultra-loose monetary policy will be a challenge for Yellen.
It said: "The Fed may reduce or taper its $85bn-a-month bond purchases as early as December, notwithstanding Yellen's dovish reputation.
"Yet the new chair is likely to give greater weight to the second part of the Fed's dual mandate: full employment (over inflation). This will likely mean low-for-longer interest rates."
The report also said the pace and communication of the Fed's unwinding will be Key. Yellen, who is a key advocate of forward guidance, is likely to use the policy more than her predecessor, when she takes over, BlackRock said.
"The mere mention of the word tightened monetary conditions ostensibly more than the Fed expected. It also gave emerging market investors a reality check. The lesson: Fed policy is no panacea for countries dependent on foreign funding," the report said.
"Yellen may be more forceful than the consensus-driven Bernanke, but it remains to be seen if her colleagues will go along. In an added uncertainty, a majority of voting members of the Federal Open Market Committee (FOMC) is set to change in 2014."
Last month, the Fed shocked global markets after months of forward guidance regarding the tapering of QE came to nothing (PP Online, 19 September).
At the time, equity and fixed income markets around the world rallied due to continued liquidity in the US market (PP Online, 26 September).
The impact of the Fed on global markets stems from two separate criteria, its substitution effect over other bond markets along with emerging markets holding vast amounts of US dollar reserves (PP Online, 3 October).
The succession of Ben Bernanke has been a hotly contested issue in the US, as more hawkish candidate Larry Summers withdrew his nomination after opposition from democrat senators.
The push for the Yellen from the Democrats led to concerns the nomination for Bernanke's successor has become politically compromised (PP Online, 3 October).
Categories: Economics / Markets
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