US: In the Aftermath of Summers

Published on September 16, 2013

It would be difficult to overstate how bad and indecisive President Obama looks after the stunning turn of events leading to Lawrence Summers’ withdrawal from consideration to succeed Ben Bernanke as Federal Reserve chairman.

Damage is being done not only to the independence and credibility of the Federal Reserve at a very inopportune moment of a policy transition, but to the prospects for crucial compromises on Capitol Hill to avoid a government shutdown and another clash over the debt ceiling in the coming weeks.

*** Fed Vice Chair Janet Yellen, more by default than design, is now clearly the front runner to succeed Bernanke as the next Fed chairman. Frankly, none of the other alternative names floated in recent weeks – Don Kohn, Roger Ferguson, Stanley Fischer, Alan Krueger – come close to equaling Yellen’s credentials, even though her nomination is still not a done deal. If not Yellen, we think Tim Geithner should not be ruled out as a potential nominee, even though he has reaffirmed his desire not to be considered. ***

*** From here on, every day uncertainty and renewed speculation is allowed to build over who the next Fed Chairman will be will damage the credibility of whoever is ultimately chosen, and the more risk there will be of ¬†an adverse market reaction. While we certainly understand the markets’ knee jerk rally in response to Summers’ withdrawal, the fact is that Summers was never going to be adopting a more hawkish policy posture if he were Fed chairman than Yellen anyway, and we suspect the rally can just as likely erode if there is no certainty provided¬†as quickly as politically possible to markets on the transition – presumably soon after this week’s FOMC meeting. ***

*** It is unlikely the turn of events over Summers will alter the Federal Open Market Committee’s multiple decisions at this week’s meeting. The FOMC will press ahead with a taper, of either $10 billion or $15 billion, though we still lean a bit towards the smaller amount simply because it is where the consensus will most easily come together (see SGH 9/9/13, “Fed: Where the Votes Are”). Where there is concern is that emphasis that will be put on the forward guidance that rates will be held lower for longer may carry less sway and may take longer to convey if uncertainty over the Fed leadership lingers much beyond this week. ***

*** Perhaps the most significant damage being done is to the prospects for a deal on Capitol Hill on a Continuing Resolution that can pass both the House and Senate to avoid a government shutdown and a repeat stand-off over the debt ceiling. In the vacuum left by White House indecision, both House Speaker John Boehner and Senate Majority Leader Harry Reid are finding it even more difficult to manage their wings, as both the Tea Party faction in the House and liberal Democrats in the Senate have been emboldened to double down on their positions. ***

We believe (hope) the President will unwind some of the damage done to his credibility when he holds a press conference in the Rose Garden later this morning, which was ironically going to use the five year anniversary of the financial crisis as the backdrop to promote a renewed focus on economic policy going forward.

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