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16 Sep 2013
Markets buoyed by Yellen, "Insert 'Summers Over' gag here"
FXstreet.com (London) - Markets this morning jumped on news that Larry Summers, the favourite to take over from Ben Bernanke, had withdrawn his name from the race to be the next Fed Chairman. In his absence, Janet Yellen has come to the forefront, having been previously tipped to take the top job at the US central bank before Bernanke was re-nominated by Barack Obama in 2009.
Markets dependent on a steady stream of cheap money from the Federal Reserve were buoyant on the change in the running. Summers had been seen as a hawk who would move to tighten the Federal Reserve’s monetary policy, however Yellen is seen much more in the Bernanke mould, ready to take a monetary activist stance to manipulate the economy and to keep the taps open on QE to inflate stock prices.
It should, however, be noted that Summers withdrew from the race following Democrat opposition not to his monetary stance, or his perceived-monetary stance, but to his corporate ties and his involvement in the events surrounding the 2008 crash. In July, when it became apparent that Summers was front running to take the Fed job, about a third of the 54-member Democratic caucus in the Senate signed a letter to Obama endorsing Yellen. Although the letter did not attack Summers specifically, it stressed Yellen’s “solid record as a bank regulator” and “willingness to challenge conventional wisdom regarding deregulation” – a not-so-veiled attack on Summers deregulatory stance pre-2008.
In a letter to President Obama, Summers said that “I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the administration, or ultimately, the interests of the nation’s ongoing economic recovery.”
While the markets seem to have responded in no uncertain terms to Summers exit from the running for the Fed job, just what difference would a Yellen chairmanship fundamentally make to monetary policy? It is also worth remembering that Yellen is not a foregone conclusion – Obama may still choose to throw Roger Ferguson, Donald Kohn or even Tim Geithner into the mix.
The bond markets certainly seemed unambiguous about the difference that Yellen would make over Summers – 10 year Treasuries shed 8bps on the news, on lowering worries of an aggressive tapering of the QE infinity, and the current $45bn of asset purchases made by the Fed each month, artificially depressing Treasury yields.
Yellen, currently Vice Chairman of the Fed, leads the committee on Fed communication, and has taken the lead on changes to the way that the central bank communicates information to the markets - introducing post-meeting press conferences and forward guidance on policy rates and quantitative easing.
But Fed internal policies aside, Yellen is a Keynesian monetary activist and quick to step in with a heavy hand to regulate markets – there is no coincidence that she has been pushed so heavily by the left-leaning Democrat caucus. It is unavoidable that the Fed will have to ease off its quantitative easing programme – but, if successful, Yellen will undoubtedly be slower to take her foot off the gas than Summers. And to an equities market bloated by cheep cash, and to a Treasury market artificially depressed by asset purchases, any extra time that they can be supported by the Fed is good news all round.
Markets dependent on a steady stream of cheap money from the Federal Reserve were buoyant on the change in the running. Summers had been seen as a hawk who would move to tighten the Federal Reserve’s monetary policy, however Yellen is seen much more in the Bernanke mould, ready to take a monetary activist stance to manipulate the economy and to keep the taps open on QE to inflate stock prices.
It should, however, be noted that Summers withdrew from the race following Democrat opposition not to his monetary stance, or his perceived-monetary stance, but to his corporate ties and his involvement in the events surrounding the 2008 crash. In July, when it became apparent that Summers was front running to take the Fed job, about a third of the 54-member Democratic caucus in the Senate signed a letter to Obama endorsing Yellen. Although the letter did not attack Summers specifically, it stressed Yellen’s “solid record as a bank regulator” and “willingness to challenge conventional wisdom regarding deregulation” – a not-so-veiled attack on Summers deregulatory stance pre-2008.
In a letter to President Obama, Summers said that “I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the administration, or ultimately, the interests of the nation’s ongoing economic recovery.”
While the markets seem to have responded in no uncertain terms to Summers exit from the running for the Fed job, just what difference would a Yellen chairmanship fundamentally make to monetary policy? It is also worth remembering that Yellen is not a foregone conclusion – Obama may still choose to throw Roger Ferguson, Donald Kohn or even Tim Geithner into the mix.
The bond markets certainly seemed unambiguous about the difference that Yellen would make over Summers – 10 year Treasuries shed 8bps on the news, on lowering worries of an aggressive tapering of the QE infinity, and the current $45bn of asset purchases made by the Fed each month, artificially depressing Treasury yields.
Yellen, currently Vice Chairman of the Fed, leads the committee on Fed communication, and has taken the lead on changes to the way that the central bank communicates information to the markets - introducing post-meeting press conferences and forward guidance on policy rates and quantitative easing.
But Fed internal policies aside, Yellen is a Keynesian monetary activist and quick to step in with a heavy hand to regulate markets – there is no coincidence that she has been pushed so heavily by the left-leaning Democrat caucus. It is unavoidable that the Fed will have to ease off its quantitative easing programme – but, if successful, Yellen will undoubtedly be slower to take her foot off the gas than Summers. And to an equities market bloated by cheep cash, and to a Treasury market artificially depressed by asset purchases, any extra time that they can be supported by the Fed is good news all round.