Summers departs; Yellen for Fed chief?

The shock news of Larry Summers’ withdrawal from the race to be the next US Federal Reserve chair was just the kind of surprise markets had been hoping for.

‘And summer's lease hath all too short a date'  Sonnet 18, William Shakespeare.

Mr Summers* and his rival for the job, Janet Yellen had been running quite closely for some time, so the news means that Ms Yellen is now the only person in the race. A couple of other names have been suggested – such as Timothy Geithner, former treasury secretary – who has of course worked closely with Barack Obama. However, it seems likely that Ms Yellen will take the role in January when it falls vacant.

For some, this implies that the Fed’s accommodative policy will now continue for a much longer period. Ms Yellen is seen as being from the same mould as Ben Bernanke, viewing quantitative easing as a necessity for sustaining the US economic recovery. This is why we have seen equity markets rally so strongly; investors think tapering will be much less dramatic next year than previously thought.

However, I think most of this optimism will have dissipated by the middle of the week. Firstly, the reaction is overdone. Janet Yellen is not the dovish cheerleader that many have painted her out to be. While she might be slightly more predisposed to easing, the rest of the Federal Open Market Committee (FOMC) is not overtly dovish. She might pull back slightly on tapering, but QE4 is not going to be forthcoming.

Secondly, the FOMC meeting this week is by far the more important development. This will rapidly take precedence over the weekend news, with the key element being the size of the taper (if, indeed, there is one). Expectations are in the range of $10-$15 billion, with the higher end likely to provoke a round of dollar buying and stock weakness. Conversely, a lower taper could see stock indices react in a more measured way.

We have plenty of time to worry ourselves about what Janet Yellen will do if she gets the job. For now, there is the taper, and only the taper.

*On a side note, I said someone with the name ‘Larry’ couldn’t possibly occupy a central bank chair. Looks like I was right.

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