As Barack Obama broke the norm and dispelled long held prejudices by becoming the first elected black US President, many are asking if Janet Yellen will also make history by being appointed as the first FED’s chairwoman and indeed, arguably the most powerful woman in the world?
That question will remain unanswered until this year’s fall and that will most certainly provide food for thought for the White House, the senate, and investors alike.
Even though no one can be sure about who will be finally be chosen as the FED’s chairperson, we can at least can take a look at the shortlist for the prize (if you can call it that given the QE mess that Bernanke is leaving behind!), and where the smart money is currently running. There are three names in the frame.
The differences between each of the candidates are enough to put the markets in roller coaster mode as we near the announcement of the nominee. If past history is any guide, there could be a huge sell off right after (as with Bernanke’s appointment) as the market is unsure how they will operate, and made all the more difficult now with the WE exit and ZIRP normalisation process to come.
While for now, the market appears to be pricing in an 80% chance of Yellen making history by being appointed as chairwoman, Obama’s agenda may actually be in a different direction… After a massive experiment with monetary policy, with trillions of assets been purchased by the FED and a continuing near zero funds rate, the dovish profile Yellen conveys, may not actually be the best route for the US future. Monetary easing should now be well and truly over as the US economy is nowhere near the nadirs seen in the aftermath of the GFC, nor indeed in a recession. Current rates are far below where they have been at this stage in previous recoveries and Bernanke’s policy of prolonging the easing is madness in our opinion.
The actual level of employment and national product is still far from pre-crisis levels, and the burden of further stimulation, if necessary, should now be transferred gradually to the government via fiscal measures. The next chairperson will certainly have to display strong qualities as a crisis solver and market soother. He/she will have to be very flexible and astute as the effects from this long experimental period of monetary policy may not be felts for some years yet and certainly do not have a prescription in the textbooks.
With the above in mind, it is very unlikely that the next name on the list would have a chance at being nominated as the next chairman. Don Cohen, a FED insider has spent 40 years within the Federal Reserve System. He certainly knows about monetary policy and the inner workings of the Fed, probably better than all others, and some believe he is the most desperate about being made chairman. But, he is also now past retirement age at 70 years old and the job of the man with the levers of power at the world’s only superpower central bank and holder of reserve currency status is a tough one and requires a great deal of energy.
Regarding Yellen, she’s a strong advocate of the current quantitative easing program and therefore supposedly “very Wall Street friendly”. Markets seem to want her as chairperson as it just means more of the same ol same ol – a QE4EVA policy with risky assets going higher and higher until, inevitably, as they always do, the bubble bursts. Under her stewardship, the Uncle Sam would not need to tightly manage its budget as there would be always someone buying its debt, but at the same time it would be kicking the can, not just down the road, but into kingdom come!
The final contender is Larry Summers, former US Treasury Secretary with a large experience in managing crisises and advising Presidents (at the time it was Clinton). Maybe he is able to address all of the main problems that may arise from the continuing QE. He was a strong advocate of financial deregulation in the past, something which is preventing the Democrats from accepting him outright although it has to be said that he is not as QE friendly as Yellen is and so his appointment very probably will create a market swoon.
The debate about the next FED’s chairman will likely continue during the remainder of summer but, to us, the market is priced for a Yellen victory and will sell off on any other being appointed as chairman and probably on her appointment too. For the US economy and for global stability, it is high time that someone got serious about the long-term effects of printing money out of fresh air and were are now past the hour of letting the economy do what it will, no matter how badly Wall Street reacts.
Richard Jennings, CFA. Fund Manager Titan Investment Partners