Larry Summers will not be next Fed’s President

Larry Summers has declined the opportunity to be appointed Chairman of the Federal Reserve to replace Ben Bernanke whose term will end on January 31. (The letter is available in pdf format here Summers’ Letter )
This reopens the debate on the successor to Ben Bernanke. Janet Yellen could become a favorite. However if she has a strong support by economists (see the petition here) she does not seem to have a strong support of the White House.
The names circulating are those of Christina Romer who was associated with Larry Summers at the beginning of Barack Obama first mandate. She was chief economist of the Council of Economic Advisers. Also referred are Donald Kohn, Roger Ferguson former Fed members but also Stan Fisher an economic professor at the MIT who has just completed his term as president of the Bank of Israel.

The question of a change in interest rates is not yet fully lifted by the premature release of Summers. A few weeks the following alternative was at stake: Janet Yellen following Bernanke’s commitments was supposed to keep interest rates unchanged until in 2015; Larry Summers was seen as little constrained by the Fed’s commitments. The advantage that Summers seemed to have at the White House has created uncertainty on the possible direction of monetary policy. He was perceived as a central banker who could increase interest rates more rapidly than what had been imagined by Bernanke. This has fed a risk premium.
Although Janet Yellen seems to be the favorite, she must convince Barack Obama and it does not seem to be easy. The premium, however, could  decrease as favorites now are a priori quite close to Bernanke. That said we should not be surprised if Monday there are movements along the US yield curve. The horizon has changed and there is has no doubt that new information will arrive soon including Janet Yellen. This will create volatility.

A major change with the removal of Larry Summers is that the validation of the White House choice by Congress will be easier and less uncertain. We saw during the weekend that several important Democrats had already taken a position to defeat Larry Summers if it was named. This is one of the reasons cited by Summers in his letter. Potential candidates have not the political background of the Harvard professor (he was in Clinton administration) and the new Fed’s president chosen by Barack Obama should generate less uncertainty at the Congress..

This post in pdf Summers-PW-en-09-16-13

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