The incoming chair faces this challenge with a much more fragile balance sheet than the one inherited by Mr Bernanke. At the end of 2006 the Federal Reserve Banks’ combined balance sheet amounted to $873bn, with capital of $30.6bn or a very slender looking 3.5 per cent.
It is a tribute to Mr Bernanke’s handling of the crisis that few are raising concerns about the balance sheet today. But Ms Yellen has to establish her credibility and the terrain is becoming tougher as the markets’ obsession with tapering and scepticism about forward guidance suggests. Monetary policy is now determinedly experimental and the attempt to link it to real outcomes such as unemployment – which is, after all, a lagging indicator – brings back memories of the inflationary misery of the 1970s.
One very obvious risk is that policy rates will remain low so long that asset prices reach territory from which they cannot return without a big bump that might expose the fragility of a banking system that is even more concentrated than before the crisis. Or markets might conclude that the Fed has given up on inflation so that inflationary expectations become unanchored. At that point the balance sheet might start to matter as credibility became a serious concern.
An elegant exit from unconventional measures will require the kind of footwork that does not come easily to central bankers.
Of the other lurking monsters, an obvious one is that Ms Yellen could be sandbagged at any time if Washington’s fiscal civil war results in a bond market plunge and a collapsing dollar. Less obvious are the external threats, but they are no less real.
The writer is an FT columnist