Yellen, the first woman to lead the Fed in its 100 years, was sworn in during a brief ceremony in the central bank's board room. She succeeded Ben Bernanke, who stepped down last week after eight momentous years.
Bernanke is joining the Brookings Institution, a Washington think tank, where he will be a distinguished fellow in residence, Brookings announced Monday.
The economy Yellen inherits is far stronger than the one Bernanke faced in the fall of 2008, when the worst financial crisis since the 1930s erupted. Bernanke spent the rest of his tenure launching and managing an array of programs that are widely credited with helping restore lending and strengthen the financial system and economy after the Great Recession.
BERNANKE: Joins Brookings Institution
Yellen, 67, who served as vice chair under Bernanke, is taking over just as the Fed has begun its first modest moves to scale back its enormous support for the economy. At a meeting last week, the last under Bernanke's leadership, the Fed approved a second $10 billion reduction in its monthly bond purchases to $65 billion.
The first cut was announced at the Fed's December meeting, when it said it would trim its purchases from $85 billion a month, the level for more than a year. The Fed's bond buying has been intended to keep long-term interest rates near record lows to stimulate the economy.
But as the economy has improved, Fed officials have decided it could withstand less help. The Fed is expected to keep reducing its bond purchases this year and end them altogether in December.
If the Fed moves too quickly to withdraw its stimulus, it could spook financial markets and send rates higher. Conversely, paring its bond buying too slowly could risk creating bubbl! es — that might burst — in real estate, stocks or other assets.
Already, concern about reduced Fed bond buying and the prospect of higher U.S. rates has shaken global markets. Central banks in several emerging nations have raised rates to try to prop up their falling currencies and control inflation. Stock prices have sunk.
Countries such as Turkey, India and Brazil had benefited from the Fed's bond purchases. Investors poured money into these countries in search of higher yields than they could get in the United States and other developed nations. Now, with U.S. rates possibly headed up, investor money is flowing back out of these countries.
Sung Won Sohn, an economics professor at California State University Channel Islands, said he wouldn't be surprised if the Fed slowed or even halted its bond reductions if the turbulence overseas worsens.
"If the global market turmoil continues, I think the Fed will have to take notice," Sohn said. "We are living in an interconnected world, and I don't think the Fed can ignore what is happening overseas."
The Fed's next meeting, the first with Yellen in charge, is March 18-19. She is scheduled to hold a news conference afterward. Before then, Yellen will appear before Congress next week to deliver the Fed's twice-a-year report on its handling of rates and its economic outlook.
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, has been vocal in his criticism of the Fed's policymaking. Hensarling has argued that the Fed's use of trillions in bond purchases and ultra-low rates have left the country vulnerable to higher inflation and economic instability. He has announced hearings on the Fed's bond buying and its "potential unintended consequences."
Yellen has said that such fears are overblown and that the Fed has the means to monitor risks and address them.
A close ally of Bernanke, Yellen is expected to follow his approach of maintaining low short-term rates while gradually scaling back the bond ! purchases! designed to keep long-term rates low.
Yellen made no comments during the ceremony Monday in which the oath of office was administered by Fed Governor Daniel Tarullo, the senior member of the Fed's seven-member board.
She was sworn in before a fireplace in the Fed's stately board room. Her husband, George Akerlof, a Nobel-winning economist, was present, as were Fed board members and staff.
Yellen's four-year term as Fed chair will end on Feb. 3, 2018. But Fed chairs generally serve more than one term.
In the meantime, a blog posting from Brookings said Bernanke would work on a book about his years at the Fed. In the past, Bernanke has said he looked forward to writing and giving speeches once he stepped down.
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