Summer(s) Ends Early on Wall Street; What Now?

September 16, 2013 9:12 AM EDT
The summer season officially ends on Saturday, September 21, but on Wall Street that season ended today.

Larry Summers has withdrawn his name to replace Ben Bernanke ad Fed Chairman and markets are ecstatic as he was seen as more hawkish. His withdraw puts dove Janet Yellen as the front-runner.

The Summers news is deeply political in nature. On Friday, Senator Jon Tester (D), who is considered a moderate, said he would oppose Summers' nomination. According to Compass Points' Isaac Boltansky this likely had a direct impact on the situation. "The opposition of liberal-leaning Senators such as Senators Merkley (D-OR) and Brown (D-OH) is one thing, but losing a comparatively moderate lawmaker like Sen. Tester undoubtedly changed the White House calculus underpinning this decision," the strategist said.

Boltansky sees three top takeaways from the news:

1. First, in the near-term, this is likely to be viewed positively both because Summers is viewed as more hawkish than Yellen and because there is now less likelihood of a contentious confirmation fight emerging this fall.

2. Second, this announcement has no direct impact on the upcoming FOMC meeting scheduled to conclude on Wednesday.

3. Third, this announcement and the condensed calendar increase the likelihood that President Obama does not make his Federal Reserve nominations until October.

While Yellen is "unquestionably" the favorite, the strategist notes that it is not yet a lock. He gets the sense that President Obama dislikes the notion that he is being forced into picking any nominee, including Yellen. "We continue to believe that Yellen will become the nominee due to both her experience and the relatively easy path to confirmation she would face, but caution that it may be premature for Yellen to start moving her belongings to the Chair's office."

Other potential picks, include: Don Kohn, Roger Ferguson, and Alan Krueger.

Given complications in the calendar, this increase the likelihood that the White House will not make its Federal Reserve nominations until early October, Boltansky said.

Another thing to watch is that the changes to the Fed will likely make the FOMC modestly more hawkish in 2014. "We believe it is important to note that there will be other changes of consequence on the FOMC in 2014 and these changes taken in their totality could be more impactful than the Chairmanship. The current composition of the FOMC gives the White House some latitude to craft a “Noah's Ark” confirmation compromise as it has previously done for Fed nominees. The “Noah’s Ark strategy” is, in effect, a compromise which lets each party advance one nominee it prefers (this strategy was used for current Fed Governors Jeremy Stein and Jerome Powell). Our assessment of the FOMC’s composition in 2014 shows that as many as four of the seven seats on the Board are likely available for the White House to use in crafting a Noah’s Ark confirmation strategy (highlighted below). The table also highlights Cleveland Fed President Pianalto and Governor Powell. While Governor Powell's term expires in January we expect for the White House to re-nominate him to the seat. Pianalto has announced that she will retire in early 2014 but it is the Cleveland Fed that will choose her replacement, not the White House."

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