Janet Yellen probably will confront a test during her tenure as Federal Reserve chairman that both of her predecessors flunked: defusing asset bubbles without doing damage to the economy.

The central bank’s easy money policies already have led to pockets of frothiness in corporate debt and emerging markets. The danger is that unwinding such speculative excesses will end up shaking the financial system and hurting growth.

Yellen is “going to be trying to do something that no one has ever done,” said Stephen Cecchetti, former economic adviser for the Bank for International Settlements, the Basel, Switzerland-based central bank for monetary authorities. She needs “to ensure that accommodative monetary policy doesn’t create significant financial stability risks,” he said in an interview.

David Fuller's view

From all reports, Janet Yellen is as smart and experienced as anyone at the Fed, and just as important, she seems to have her ego well under control.

Nevertheless, she faces an important challenge at an uncertain time because no one knows in advance how the QE programme will play out, not least as it is wound down, because there is no clear precedent. 

Moreover, while the accelerating rate of technological innovation is an incredibly exciting development which is already challenging our imaginations, it is also creating a social problem as smart machines replace even smart workers at a faster pace than new jobs are created. Excess liquidity and high frequency trading present additional challenges for the Fed.  Also, while Janet Yellen obviously has some capable colleagues in the Fed’s various departments, new challenges can easily divide opinions, leading to some turf wars.

In conclusion, these are interesting times and very promising for the longer term, thanks to accelerating technological innovation, the potential for cheaper energy, the triumph of capitalism in its various forms, and the increasing global middleclass as a result of these developments.  We should also expect some increasingly choppy market conditions over the short to lengthy medium term.