Recently, Larry Summers withdrew his name for Federal Reserve Chairman. This might not seem like big news, but in the Business/Economic world, it was monumental.
Current Federal Reserve Chairman Ben Bernanke's term is scheduled to end in January of 2014, and Economists and Investors around the world are looking for a replacement Chairman who will continue to support Quantitive Easing. Larry Summers, former Treasury Secretary, was rumored to be one of the top two people most likely to replace Bernanke.
Larry Summers: Larry Summers has been described by most Economists as a hawk towards fiscal policy. By definition, he is more concerned with interest rates and inflation then economic growth. If Summers was elected/approved by the Senate to be Fed Chairman, one of his first actions would be to end/drastically slow down the Fed's Quantitive Easing program. The Quantitive Easing program is responsible for helping keep Interest rates low by having the Federal Reserve buy $85 billion in US Treasuries and Bonds per month. The QE program was started to help jump start the economy; by keeping interest rates low, companies could afford to borrow money, hire more workers, spend more money, and have consumers/people spend more money. The Quantitive Easing program worked, currently, the economy has improved a lot, consumer, and business spending is up, the stock market is doing well, and unemployment rate is at 7.3%, and has been on a steady decrease. The problem with this massive bond buying program is that it will cause inflation. Because the bond buying program will keep interest rates low, the consumer has more borrowing power, and will spend more money causing prices to increase. In other words, the demand for money will increase because people borrow more at low interest rates, and the supply of money will not increase, causing an increase in prices, and a decrease in purchasing power. As a hawk, Summers will be more concerned with keeping inflation rates low by increasing interest rates. How can he easily increase the interest rate? Stop the QE program. By stopping the program of buying $85 billion in bonds and treasuries per month, the price of bonds decreases, and the interest rate increases.
Although keeping inflation rates low seems like a good idea, higher interest rates will negatively affect the growth of the economy, which worries many investors and economists. The economy is not where most economists would like to see it at; the economy has not recovered to pre-Depression levels. As a result, they fear that the economy is still fragile, and increasing interest rates will only damage the economy, and further slow growth. At the beginning of 2013, Summers seemed like an ideal replacement for Bernanke. Now, however, the economy's growth is below what most economists and analysts predicted, which means that the economy still needs QE, which Summers does not support. This is probably the primary reason that Summers withdrew his name from Fed Chairman; his policies were not favorable/best for the current American economy. Investors in the stock market are concerned with Summers because if interest rates increase, bond yields will increase, and the stock market returns will decrease. The effects of Summers 'drop-out' from Fed Chairman were shown in the markets immediately; the dollar fell, and Dow and S&P 500 futures shot up.
Janet Yellen: Janet Yellen, current Federal Reserve Vice Chairman, is predicted to win the Fed Chairman nomination. Yellen is more dovish then the previously mentioned Larry Summers. By definition of being a dove, Yellen will be more tolerant of increasing inflation rates, and more concerned with lowering the unemployment rate. In Yellen's mid 2000, post-crisis book, she states that "everything the Fed should be doing should be oriented towards addressing the unemployment problem", confirming the "dovish theory". Yellen is also widely recognized as being one of the first people to recognize and predict the looming financial crisis in 2007 that Bernanke thought would be avoided. The Fed's job is to predict the path of the economy, and adjust policies to fix the economy, and she did a perfect job of the prediction part. Another reason why Yellen is favored by many Democrats is because she has no ties to Wall Street, and is in favor of stricter regulations to limit financial losses, like the London Whale loss.
Current Federal Reserve Chairman Ben Bernanke's term is scheduled to end in January of 2014, and Economists and Investors around the world are looking for a replacement Chairman who will continue to support Quantitive Easing. Larry Summers, former Treasury Secretary, was rumored to be one of the top two people most likely to replace Bernanke.
Larry Summers: Larry Summers has been described by most Economists as a hawk towards fiscal policy. By definition, he is more concerned with interest rates and inflation then economic growth. If Summers was elected/approved by the Senate to be Fed Chairman, one of his first actions would be to end/drastically slow down the Fed's Quantitive Easing program. The Quantitive Easing program is responsible for helping keep Interest rates low by having the Federal Reserve buy $85 billion in US Treasuries and Bonds per month. The QE program was started to help jump start the economy; by keeping interest rates low, companies could afford to borrow money, hire more workers, spend more money, and have consumers/people spend more money. The Quantitive Easing program worked, currently, the economy has improved a lot, consumer, and business spending is up, the stock market is doing well, and unemployment rate is at 7.3%, and has been on a steady decrease. The problem with this massive bond buying program is that it will cause inflation. Because the bond buying program will keep interest rates low, the consumer has more borrowing power, and will spend more money causing prices to increase. In other words, the demand for money will increase because people borrow more at low interest rates, and the supply of money will not increase, causing an increase in prices, and a decrease in purchasing power. As a hawk, Summers will be more concerned with keeping inflation rates low by increasing interest rates. How can he easily increase the interest rate? Stop the QE program. By stopping the program of buying $85 billion in bonds and treasuries per month, the price of bonds decreases, and the interest rate increases.
Although keeping inflation rates low seems like a good idea, higher interest rates will negatively affect the growth of the economy, which worries many investors and economists. The economy is not where most economists would like to see it at; the economy has not recovered to pre-Depression levels. As a result, they fear that the economy is still fragile, and increasing interest rates will only damage the economy, and further slow growth. At the beginning of 2013, Summers seemed like an ideal replacement for Bernanke. Now, however, the economy's growth is below what most economists and analysts predicted, which means that the economy still needs QE, which Summers does not support. This is probably the primary reason that Summers withdrew his name from Fed Chairman; his policies were not favorable/best for the current American economy. Investors in the stock market are concerned with Summers because if interest rates increase, bond yields will increase, and the stock market returns will decrease. The effects of Summers 'drop-out' from Fed Chairman were shown in the markets immediately; the dollar fell, and Dow and S&P 500 futures shot up.
Janet Yellen: Janet Yellen, current Federal Reserve Vice Chairman, is predicted to win the Fed Chairman nomination. Yellen is more dovish then the previously mentioned Larry Summers. By definition of being a dove, Yellen will be more tolerant of increasing inflation rates, and more concerned with lowering the unemployment rate. In Yellen's mid 2000, post-crisis book, she states that "everything the Fed should be doing should be oriented towards addressing the unemployment problem", confirming the "dovish theory". Yellen is also widely recognized as being one of the first people to recognize and predict the looming financial crisis in 2007 that Bernanke thought would be avoided. The Fed's job is to predict the path of the economy, and adjust policies to fix the economy, and she did a perfect job of the prediction part. Another reason why Yellen is favored by many Democrats is because she has no ties to Wall Street, and is in favor of stricter regulations to limit financial losses, like the London Whale loss.
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