The Race For The (Fed) Throne – An Update On The Nominees

Confused by all the trial balloons, meandering daily Op-Eds (most of which written by novice journalists with even more bizarre agendas), and “paddy power” market updates? Then here is Scotiabank’s Guy Haselmann with his latest rundown on just where we stand in the race for the next Fed chairman.

From Guy Haselmann of Scotiabank

Comment on Fed Chair Nominee

  • For the moment, the list of potential candidates for the nomination of the next Fed Chair appears to be limited to three names: Yellen, Summers, and Kohn.  I will offer a quick comment on each candidate.
  • The White House was probably surprised by the extent of the reaction to the floating of the Larry Summers trial balloon. It appears the White House is now aggressively trying to make its case to Dems and to markets. Lobbying efforts have been fierce on both sides.  There has been an extraordinary number of articles detailing the pros and cons of the leading contenders.  This seems justified given its enormous importance to markets.
  • Investors seem to still believe (with about 80% or so certainties) that Yellen will be nominated.  I believe the chances of Obama nominating her is infinitesimally small primarily because his ideology stands radically opposed to what current Fed policy represents.  QE lifts prices of risk assets, making rich people richer; after all, the wealthiest people own the vast majority of risk assets.  At the same time, ZIRP acts as a wealth transfer from the poor to the rich. 
  • Obama is aggressively outspoken about the growing wealth divide and income inequalities.  The last thing he wants to do is further exacerbate them and fuel benefits to the “millionaires, billionaires, fat cats, and jet-setters”.  In addition, it is widely believed that QE policy enables fiscal stalemate.  Therefore, Obama likely wants and needs a different direction.  This will require a Chairman who is an expert crisis manager who can navigate the inevitable fallout that will inevitably result from a change in  Fed policy or from the removal of the “Fed put”.
  • The Dem’s major opposition to Summers is because they believe he is soft on regulation, and therefore too friendly to Wall Street. This is ironic because Wall Street has no better friend than the QE and extraordinary easy money policies championed by Yellen.
  • Don Kohn would be an ideal candidate and great compromise.  He spent his entire 40 year career in the Federal Reserve System.  He was well liked by Fed colleagues, politicians, and financial market contacts.  During his career, he wanted desperately to be the Fed Chairman.
  • However, today he may not want to come out of retirement, especially for ‘this’ position.  The job now is materially different than in the past due to rates being stuck at the zero lower bound for the fifth year in a row.  There are other policy constraints as well. 
  • Furthermore, the job would begin during the peak in risks of the greatest monetary policy experiment in modern finance. Lastly, superstar – yet mortal – Don Kohn is 70 years old.
  • I still believe Summers will get the nod and that Obama’s chosen candidate will NOT get held up by the Dems regardless of who it is. More importantly, I believe the markets will have an adverse reaction to any non-Yellen candidate. Markets should price in a quicker end to QE and faster pace of rate normalization.  Therefore, the market is likely underpricing the risks and embedded optionality of the announcement of the chosen nominee.
  • “In my house I’m the boss, my wife is just the decision maker.” – Woody Allen


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