With former U.S. Treasury secretary, Larry Summers, dropping out of the race for the job as chair of the U.S. Federal Reserve Board, the market needs a decision on the next head of the Fed soon, says Montreal-based BCA Research.
“With Summers now out of the race, a speedy decision would be the most market-friendly outcome,” the independent research firm says in a research note.
BCA notes that financial markets do not like uncertainty, and, in addition to the uncertainty over who will be the next Fed chairman, it says that there is also uncertainty about the likely trajectory for monetary policy under a Fed led by Summers. By contrast, the other leading candidate, Janet Yellen, is a ‘transparent’ dove and supporter of forward guidance, it says.
However, it remains to be seen if President Obama will now nominate Yellen, or choose someone else to avoid being perceived as conceding to liberal senators. “Regardless, Obama will not do investors any favours by dragging out the process,” BCA says.
“If market participants worry that there is potential for the next Fed chairman to deviate from the current course of policy, then the effect of any changes to forward guidance delivered this week will be diluted,” it adds.
“The rally in risk asset prices on the back of Summers’ withdrawal will be short-lived if a long nomination process breeds uncertainty regarding the future make-up of the Fed,” it concludes.