Summers Seen Prone to Tighter Credit Than Yellen in Poll
Lawrence Summers would keep Federal Reserve policy tighter than Janet Yellen, his main rival to replace Chairman Ben S. Bernanke, according to a Bloomberg Global Poll.
Thirty-five percent of investors, analysts and traders who are Bloomberg subscribers say Summers may provide less stimulus than Bernanke, whose chairmanship ends in January, compared with 13 percent who see Summers with looser policy and 22 percent saying it’d be the same. Forty-seven percent see Yellen presiding over the same policy, with 17 percent saying it’d be looser and 8 percent saying tighter. The rest said they don’t know how it would change.
President Barack Obama is preparing to nominate a new Fed leader as monetary policy nears a turning point. U.S. central bankers are debating how and when to pare their $85 billion in monthly bond purchases as the U.S. economy improves and unemployment declines. The Federal Open Market Committee is scheduled to meet Sept. 17-18 to consider the future for the third round of quantitative easing known as QE3.
“I would expect a Summers-led Fed to shorten the timeline for the Fed to exit QE3, based on reports that he is somewhat skeptical of the benefits of the program,” said John Carlson, president of Epic Investment Management LLC in Boulder, Colorado. “Conceivably, it could mean the Fed also begins raising the fed funds target rate sooner, but that rate hike is so far down the road that the issue is mostly theoretical at this time.”
The yield on the 10-year Treasury note fell to 2.91 percent yesterday in New York from 2.96 percent a day earlier, according to Bloomberg Bond Trader prices. The yield closed at 2.99 percent on Sept. 5, the highest in more than two years, as investors prepare for the wind down of the central bank’s monetary stimulus. The national average for the 30-year fixed mortgage rate has risen to 4.57 percent from 3.35 percent in early May, according to Freddie Mac.
The poll, conducted Sept. 10, showed 40 percent of respondents see Summers getting the job, compared with 33 percent for Yellen, the Fed’s vice chairman. Three percent see Obama opting for former Fed Vice Chairman Donald Kohn, while the remainder said they didn’t know or expected Obama to pick someone else.
In a May 14 poll of investors, Yellen was seen as the most likely selection by 34 percent of investors, more than any other candidate. Twenty-seven percent of investors thought that Bernanke would be reappointed. Summers was seen as a long-shot, with only 4 percent of investors saying he was likely to be Obama’s pick.
The selection of a new Fed chairman is just one politically sensitive issue before the president. Obama might wait until the crisis in Syria eases before pressing forward with a contentious Fed nomination.
“Obama’s preference would obviously be Summers, but given Syria, he may be forced to switch,” said Neil Jones, head of European hedge-fund sales for Mizuho Bank Ltd. in London. “Summers will create further political upheaval.”
Summers has already provoked a political backlash within the Democratic Party based on his role in Clinton’s Treasury Department on financial deregulation, which some say contributed to the 2008 financial-market crisis.
Twenty members of the Senate Democratic caucus endorsed Yellen in a letter to the president in July. Yellen this week also won the endorsement of more than 300 economists who have signed an open letter urging Obama to appoint her.
Bloomberg’s poll shows that Yellen is viewed more favorably among investors, too. Sixty percent of respondents had a positive view of Yellen, compared with 37 percent for Summers. Thirty-five percent had a negative view of Summers, compared with 15 percent for Yellen.
Some investors raised concern that Yellen would be too stimulative, saying that winding down the bond-buying program would be the best outcome.
“They are both qualified for the job,” said Sam Katzman, chief investment officer of Constellation Wealth Advisors in New York. “However, they both have their issues: with Yellen I have a difference in ideology, and with Summers the issue is more of personality.”
As vice chairman of the Fed since 2010, Yellen has been an architect of the central bank’s record stimulus. Summers, a former Treasury secretary and president of Harvard University, may not fit in as well with the central bank’s culture, said Guy LeBas, the chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.
“Summers is a highly qualified and experienced economist,” LeBas said. “What he lacks is the management style under which the Federal Reserve culture has thrived.”
That difference will lead to a change in the climate for investments as well, he said.
“A Yellen Fed would encourage us to take more risk -- that is, to recommend longer duration and higher credit risk bonds to our clients -- than either a Summers or a Kohn Fed would,” LeBas said.
Economist Julia Coronado at BNP Paribas in New York has estimated that the yield on the 10-year Treasury note would rise about 50 basis points if Summers is nominated instead of Yellen. A basis point is 0.01 percentage point.
That would cause the firm to lower its forecast of gross domestic product growth over the next two years by 0.5 to 0.75 percentage point and would mean 350,000 to 500,000 fewer jobs, Coronado said in a note published Aug. 29.
The poll of 900 Bloomberg subscribers was conducted by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 3.3 percentage points.
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