Did Summers Just Throw Bernanke a Lifeline?
Summers is out!
Citing a likely "acrimonious" confirmation process, Former Treasury Secretary, Lawrence Summers, informed the President on Sunday that he no longer wants to be considered for the top post at the Federal Reserve. And he was the front-runner for the nomination, too.
Mind you, we're just days away from the most highly anticipated Fed meeting in history, when everyone but me expects Ben Bernanke to ease off the monetary stimulus. So the timing couldn't possibly be worse.
You see, with no obvious successor to the throne of the Federal Reserve, there's no way for investors to handicap the Fed's future policies.
"The biggest problem with this period of indecision about Bernanke's successor is that it does have an effect on the Fed's ability to conduct monetary policy," says Ward McCarthy, Chief Financial Economist at Jefferies LLC.
In other words, it creates uncertainty. And as we all know, Wall Street hates uncertainty.
So what does this last-minute curveball mean for the Federal Reserve - and, most importantly, our investments? The answers might surprise you…
Get Ready for Another Curveball
On the heels of Summers' announcement, global equity markets rallied. Strongly. And the reason is simple…
"Markets were priced for the likelihood of a Summers nomination, primarily for the notion that he might raise interest rates sooner than perhaps other candidates," says Tony Crescenzi, Portfolio Manager and Strategist at PIMCO.
Simply put, the market expected a hawk. But Obama's trusted political allies don't seem to like hawks very much, no matter how rare they are inside the Capital Beltway.
Now it appears the next Fed Chairman is going to be more accommodative (i.e. - dovish). So investors needed to reprice the risks.
I'm convinced that another curveball could be coming, though.
Continuity Reigns Supreme
Other than Summers, President Obama has mentioned two other possible nominees for the top spot at the Fed: Fed Vice Chairman, Janet Yellen and former Fed Vice Chairman, Donald Kohn.
With Summers out, "Yellen now becomes the clear favorite," says Greg Valliere, Chief Political Strategist at Potomac Research Group.
Many pundits agree. After all, she already has the support of 20 U.S. senators. (A few months ago, 19 democratic senators and one independent senator sent President Obama a letter urging him to tap Yellen for the top spot at the Fed.)
So she wouldn't have to endure an "acrimonious" confirmation process. And neither would the market.
Not to mention that the case being made for a Yellen takeover couldn't be more straightforward.
- "Her appointment would be viewed as more supportive for the continuation of the Fed's current loose monetary policy stance," says Lee Hardman, Currency Analyst at Bank of Tokyo-Mitsubishi.
- "She is the candidate of continuity," says Stephen Oliner, a former economist at the Fed Board of Governors.
- Or as the Financial Times' Edward Luce puts it, Yellen, like Bernanke, believes in the Fed's dual mandate "to aim for full employment, as well as low inflation."
We can all agree that continuity is the main selling point for a Yellen Fed.
But why should we mess with an imitation when we can have the real thing? If we want continuity, Bernanke is the man for the job, right?
How would that be for a curveball?
I know, I know. He's openly hinted that he doesn't want to return. Likewise, President Obama has dropped more-than-subtle hints that he doesn't want Bernanke to stay, either.
Heck, over at Irish betting site, Paddy Power, Bernanke isn't even listed as an option. Yellen is now favored to get the nomination at 1-to-8 odds. Kohn is second in line at 5-to-1 odds. American economist, Jeffrey Sachs, brings up the rear as the long at 300-to-1 odds. (See for yourself here.)
Bottom line: Another term for Bernanke isn't something many people are talking about. Or as Valliere says, "Anyone other than [Yellen] would be a major surprise." Indeed!
But the oddsmakers and pundits were completely wrong once. So there's no reason they won't be wrong again.
And while we could argue all day about Bernanke's policies, there's no arguing the outcome - he's been good for stocks . And if he returns for one more term, he'll continue to be good for stocks.