Larry Summers put a spark in the markets Monday with his weekend decision to pull out of the race to succeed Ben Bernanke as chairman of the Federal Reserve.
The focus now turns to Fed vice-chair Janet Yellen and, to a lesser extent, former Treasury secretary Timothy Geithner.
Here’s what observers are saying:
“Five (long) years on from Lehman’s collapse, and while the global economy is still struggling to find its feet, financial markets are riding high. This morning’s catalyst may be Larry Summers’ decision to withdraw from consideration for the Fed chairmanship, but the real driver is easy monetary policy. Of course. June saw a huge market blood-letting as ‘tapering’ was priced in, and the period since then has seen outflows from [emerging market] and bond funds slow, markets calm down. The issue is how long the risk party can last as talk of tapering becomes reality and before the focus switches firmly to when and how fast the Federal Reserve actually tightens policy.” Kit Juckes, chief of foreign exchange at Société Générale
“To explain the market reaction to this unexpected turn of events one has to look at the uncertainty surrounding Larry Summers stance on existing U.S. monetary policy, which has now been removed and the prospect that the current vice-chair Janet Yellen would now appear to be back in the frame for the job, soothing market nerves about the uncertainty a Summers chairmanship would have brought, and bringing with it the preferred prospect of continuity of policy at the Fed when Bernanke leaves in January next year.” Michael Hewson, senior market analyst, CMC Markets
“One could call this a relief rally after Lawrence Summers unexpectedly withdrew his name from the short list of candidates being considered to be the next chairman of the U.S. Federal Reserve. Relief because Mr. Summers was considered an unknown commodity (that is, his views on monetary policy) so if he’s no longer in the running, that leaves candidates that have worked with the Fed and their views on policy are pretty well known. And less uncertainty is always a good thing for financial markets.” Jennifer Lee, senior economist, BMO Nesbitt Burns
“Larry Summers has withdrawn his name from potential Fed Chair candidates concluding that ‘any possible confirmation process would be acrimonious’. This narrows the field of potential candidates to more dovish choices, including Chair Bernanke himself, vice-chair Yellen, Donald Kohn and several others. In addition, as we wrote on Friday, seven of the 12 voting Fed members could potentially change and this is in addition to the normal regional Fed rotations. Accordingly there are major changes going on at the Fed, which could drive a significant shift in the path of policy in 2014.” Camilla Sutton, chief currency strategist, Scotia Capital
“Yellen is now by default viewed as the clear front runner for the Fed chair. Yet, Summers dropping out does not seal her nomination. Given the divisive nature of the debate so far (Democrat senators signed an open letter urging Obama to nominate Yellen while others stated publically they would vote against Summers), the nomination may land on a third person. One possibility is Geithner though media were reporting he remains uninterested in the job.” Elsa Lignos, senior currency strategist, RBC Europe
“The widely hot-tipped favourite was clearly Obama's favourite candidate and thus this acts as yet another blow to the president at a tough time for the White House. Summers was an unpopular choice for many, given his hand in the creation of the Commodities Futures Modernization Act of 2000, which prevents the regulation and oversight of derivatives products. With the focus upon the dangerously unregulated CDO market as one of the core drivers of the 2008 crash, some see Summers as the main man behind the crisis. The focus will now shift towards alternate candidates, of which Janet Yellen is now likely to assume the mantle of market favourite. It is clear that Yellen is less aligned with Obama and would thus provide a more independent opinion rather than the White House puppet that Summers was widely expected to be.” Joshua Mahony, research analyst, Alpari
“News that Larry Summers has ruled himself out of the race to succeed Ben Bernanke as Chairman of the Fed has also been interpreted as a positive, with the market seemingly showing a preference for the continuity offered by current vice-chair Janet Yellen. A combination of these factors has forced stocks higher at the open despite the looming spectre of this week’s FOMC meeting, in which the tapering timescale may at last be resolved. Given the jobless reports we’ve seen in the last couple of months we may well see a delay in the reduction of asset purchases, and with bulls already in control this week a perfect storm could be brewing.” Matt Basi, head of U.K. sales trading, CMC Markets
“The move was likely at least as much to do with the fact that Summers probably would not pass the Senate as it had to do with sparing the administration, the Fed and the country from a divisive confirmation process. Of the 21 votes on the Senate Banking Committee that starts the confirmation process, Democrats hold 12 and Republicans hold 9. With three Democrats already saying they would vote against Summers along with the possibility of another, Elizabeth Warren, the math required all eight of the remaining Democrats and at least three Republicans to vote in favour of Summers. That was not looking terribly likely and we imagine the Obama administration and Summers’ people had a better handle on the vote prospects than what was visible although a signed petition to Obama in favour of Yellen earlier this summer made it clear where the Senate Democrats’ bias resided.” Derek Holt, Dov Zigler, Scotia Capital
“Equity and fixed income markets rallied overnight on news that Larry Summers would not, after all, be the next Fed chair, based on a misguided view that Summers would have been a policy hawk. We had noted that Summers was not in fact a shoe in for the job weeks ago, but now caution that Yellen is similarly no certainty, for the same reason. There are enough other qualified economists with similar broad views (Christina Romer, Alan Blinder, Stanley Fischer to name three) to leave plenty of doubt. Don Kohn, another reputed contender, was a bit too hawkish back in 2007 (Fed minutes show he felt the banking system would restore credit flows quickly) but that was a misread of the situation rather than a policy bent. What isn’t in doubt is the Fed will initially be dovish under any likely Obama pick (just as it would have been under Summers).” Avery Shenfeld, chief economist, CIBC World Markets
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