Barring another financial crisis or slide back into recession, the next head of the US Federal Reserve is likely to oversee a gradual normalisation of monetary policy.
But that pace, including the first interest rate hike, might be somewhat quicker under former Treasury secretary Lawrence Summers than under current Fed vice-chair Janet Yellen, the two top contenders for the job, if their own comments are any guide.
Moreover, a Summers-led Fed would appear less likely to extend or expand the use of the extraordinary measures that the central bank has undertaken during the tenure of current chairman Ben Bernanke, whose term expires in January. The distinction between Summers and Yellen is perhaps best illustrated by remarks they delivered at separate events in April.
Yellen, a strong supporter of Bernanke’s policies, in a speech to business editors in Washington, exhorted the Fed to keep its focus on efforts to foster a lower unemployment rate, even if it comes at a cost
of stronger-than-desired inflation. By contrast, Summers, in a separate, closed event in California later that month, raised doubts that the unemployment rate could drop all that much lower without kindling unwanted levels of inflation.
He also was sceptical about how effective the Fed’s massive bond buying programme, known as quantitative easing, has been in promoting economic growth.
“Both Yellen and Summers are unlikely to commit the mistake of premature policy tightening, and that risk is probably somewhat lower with Yellen than Summers,” said Michael Feroli, an economist with JPMorgan in New York.
That said, commitments the Fed has already undertaken make quick changes unlikely whoever gets the job, as St Louis Fed President James Bullard noted on Thursday.
“I would expect a lot of continuity in policy, and I think any new person coming in would want that continuity. They don’t want to come in and really rock the boat a lot. So I would expect a smooth transition,” Bullard said.
But slight differences in how the new Fed chair views policy could matter a great deal if the economy fails to recover as expected, or if there is a debate about how long to hold interest rates near zero once unemployment has fallen further.
The Bernanke-led Fed has already committed to keeping rates ultra-easy until unemployment hits 6.5%, and at least one official advocates lowering this forward guidance to 5.5% in order to hold down borrowing costs. Summers might be less inclined to back such a move