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Portfolio > Economy & Markets

PIMCO’s Gross: Will Yellen ‘Shape History?’

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Janet Yellen, considered the frontrunner to replace Ben Bernanke as head of the Federal Reserve after Larry Summers withdrew from the process in mid-September, was officially nominated by President Barack Obama on Wednesday.

The economist, who’s been vice chairwoman of the Fed since 2010, must still win Senate approval. She led the central bank’s Communications Committee, which moved to hold regular news conferences under her direction and could add further transparency.

What are some market gurus saying and thinking about her leadership?

“Now that she’s made history how will she shape history?” PIMCO co-CIO Bill Gross tweeted. “More dovish than Bernanke but runnin’ outta ammo. Depends on [forward] guidance.”

Gross has been suggesting that investors focus on short-term Treasuries rather than longer-maturity bonds. As of late September, he’s trimmed the duration of holdings in the PIMCO Total Return Fund to 4.42 years from 5.06.

Gross spoke on Bloomberg Television on Tuesday and explained, “Anything that is anchored to the policy rate, and the policy rate being something that probably is going to be 25 basis points for at least the next several years, anything that’s anchored to that will do well and had done well.

“Perhaps 10- and 30-year Treasuries, which are subject to inflation and reflation, which is basically what this policy of Janet Yellen’s is going to attempt to do, those particular maturities are probably negatively affected,” Gross said.

The Senate Banking Committee could hold hearings on Yellen’s nomination after the debt ceiling deadline, Oct. 17.

Historian Niall Ferguson, speaking to CNBC earlier this week, said that Yellen was “theoretically on the same page as Bernanke, but covertly, she would really like to have a nominal GDP target — a new level of policy innovation on the monetary side.”

“On the fiscal side, we have these unsustainable levels of private and public debt … How do you stabilize the long-term fiscal position and prevent debt accumulation from continuing?” Ferguson said.

Options at Yellen’s disposal are limited. “There is, I believe, a desperate improvisation going on inside the Fed as [quantitative easing] entered the period of diminishing returns. To the point, [that’s led to] the idea of sacrificing something somewhat effective, the forward guidance, at the altar of QE to maintain it, with no taper at all.”

Looking down the road to a future adjustment in interest rates, say in 2016or 2017, the transition “will be very sudden and sharp,” the Harvard professor said, “one of the sharpest adjustments in short rates we’ve ever encountered.

Her Holdings

Yellen’s portfolio, according to The Street, included more than $10 million of investments in Vanguard and Fidelity funds as of 2011, such as shares of the Vanguard Extended Market Index (VEXAX), which tracks mid-cap and small stocks.

On the active side, she has shares of the Fidelity Diversified International Fund (FDIVX) and Fidelity Investment Grade Bond (FBNDX). In her taxable account, she has large holdings in the Vanguard Tax-Managed Growth & Income (VTGLX).

Check out Niall Ferguson: 4 Reasons America Is Falling Apart on ThinkAdvisor.


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