Risk Management, Trading & Portfolio Strategies

Is Larry Summers a risk for global markets?

Who's going to take over the Fed next? Both top candidates are worth considering.

Who’s going to take over the Fed next? Both top candidates are worth considering.

As speculation grows over who President Barack Obama will tap to lead the Federal Reserve after Ben Bernanke's presumptive exit in January 2014, one question being asked is how each of the leading candidates – Janet Yellen and Lawrence Summers – will impact the current progression in global markets. 

Yellen, in this regard, is a much easier nut to crack. Given her decades of experience at the Fed – serving as president of the San Francisco Fed, and then later as Bernanke's second-in-command – it's probable that Yellen will not deviate from her presumed predecessor's policies. Her nuanced understanding of monetary policy and appreciation for consensus-building makes her appear to be an ideal choice to lead the Fed during an extraordinary time.

Summers, on the other hand, is a mixed bag at best. His history suggests that he has often benefited from Wall Street largesse, both during his time between the Clinton and Obama administrations and even while serving as a senior economics advisor during President Obama's 2008 campaign. A recent editorial in The New Yorker suggested that the biggest risk of a Summers candidacy is that markets could perceive him as a potential threat to the ultra-easy credit policies of Bernanke.

"Nominating Summers could create an expectation that the Fed would wind down quantitative easing more rapidly than the market currently thinks, which could conceivably lead to a spike in long-term rates. At the very least, Summers would need to deal with the perception that his appointment could lead to a change in policy," the source's John Cassidy wrote.

At this stage, it's too early to say who markets would prefer – although pundits claim that a Yellen leadership has already been "priced in." A shift in direction could create a more volatile environment, which might make portfolio risk management harder for investors.

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