Yellen drew outspoken support from Senate Democrats, a third of whom signed a letter this summer urging Obama to choose her. This month, more than 350 economists signed a letter to Obama urging him to nominate Yellen.
Obama's choice of Yellen coincides with a key turning point for the Fed. Within the next several months, the Fed is expected to start slowing the pace of its Treasury and mortgage bond purchases if the economy strengthens. The Fed's purchases have been intended to keep loan rates low to encourage borrowing and spending.
While economists saw Obama's choice of Yellen as a strong signal of continuity at the Fed, analysts said the difficult job of unwinding all of the Fed's support without causing major financial market upheavals would fall to Yellen.
"Yellen is not going to rock the boat in terms of her approach to monetary policy," said David Jones, chief economist at DMJ Advisors. "But it will be her challenge to reverse this prolonged and unprecedented period of monetary ease."Yet even after the Fed scales back its bond buying, its policies will remain geared toward keeping borrowing rates low to try to accelerate growth and lower unemployment. The national unemployment rate is a still-high 7.3 percent. Few expect the Fed to start raising the short-term rate it controls before 2015 at the earliest. At the Fed, Yellen has built a reputation as a "dove" â¿¿ someone who is typically more concerned about keeping interest rates low to reduce unemployment than about raising them to avert high inflation. Sen. Bob Corker, R-Tenn., member of the Senate Banking Committee, said he voted against her for vice chair in 2010 because of her dovish policies. "I am not aware of anything that demonstrates her views have changed," he said. Still, Yellen has said that when the economy finally begins growing faster and rates will need to be raised to prevent high inflation, she will move in that direction.