The race to be US Fed Chairman narrows - 16 September 2013
The race to be US Fed Chairman narrows 16 September 2013
Leading candidate Lawrence Summers has withdrawn his name from the race to become the new Chairman of the US Federal Reserve (US Fed), leaving current Deputy Chairman Janet Yellen the odds-on favourite.
While the market views Yellen as more ‘dovish’ than Summers, in practice her views have been driven by good judgement of the US economic recovery since the GFC.
Ever since Ben Bernanke announced that he would not seek another term, the market has eagerly attempted to anticipate his successor. With the US Fed providing an extraordinary amount of policy stimulus, it is arguably the most powerful role in global markets. Not only do the actions of the US Fed directly influence US interest rates and the US dollar, but increasingly global bond, credit and equity markets have been driven by exceptional policy support. New Zealand markets have been no exception.
Lawrence Summers had been the leading candidate, with bookmakers ascribing more than an 80% chance of his nomination. The market had seen Summers as the more ‘hawkish’ candidate. It was suspected that he was sceptical of the effectiveness of quantitative easing (QE), that he was inclined to withdrawal more quickly from the massive monetary policy support, and likely to push the Obama administration to seek other ways of underwriting the US economic recovery. An increasing chance of Summers had been one factor pushing US 10 year yields up to 3% during the month.
While there was no doubting Summers’ professional credentials for the role, most of the focus on Summers had been on his personal failings and association with financial deregulation that some blame for the GFC. In the end this was his downfall, as he concluded “that any possible confirmation process ... would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation's ongoing economic recovery”.
By contrast, the market has seen Janet Yellen as the more ‘dovish’ candidate. Bernanke, Yellen and Bill Dudley (the New York Fed President) have been the strongest advocates of all the Fed policy measures to provide exceptional policy support, including QE and forward guidance to keep overnight interest rates near zero. It is undoubtedly true that her appointment would be seen as a strong vote for continuity, reducing the chances of unexpected policy changes that could rattle markets or derail the recovery.
In a sign that Yellen is seen as dovish by the market, when Summers pulled out of the race the US dollar weakened (pushing the NZD/USD above 82 cents) and the US 10 year yield fell nearly 15 basis points to 2.75%.
However, central bankers never like to be labelled hawks or doves. The reality is that Yellen’s policy stance has been driven by her view of the US economy. Of all the voting members of the FOMC (the interest rate setting committee), Janet Yellen has had the best economic forecasting record since the GFC, correctly picking the need for exceptional policy support. In years to come, as the outlook for the US economy evolves, Yellen’s views will also evolve. For now, that seems some a long way down the track.
Christian Hawkesby is the Head of Fixed Interest at Harbour Asset Management; a New Zealand-based asset manager with extensive professional investment experience managing funds for government institutions, corporate superannuation funds, multi-nationals, charities, banks and insurance companies.