Summers-led US Fed might raise rates faster than Yellen

Aug 19 2013, 11:19 IST
Comments 0
SummaryThe next head of the US Federal Reserve is likely to oversee a gradual normalisation of monetary policy.

if the news on the economy continued to be mixed.

Yellen’s strong support for the importance of driving down long-term unemployment, even if that meant inflation rising a bit, could be more open to such an aggressive move.

She has also laid out a so-called ‘optimal policy path’ that would permit a bit more inflation than the Fed’s 2% goal in order to push down long-term unemployment, which she views as even more damaging to the nation’s economic health.

As a result, there is a broad body of public written and spoken commentary in which she has articulated an approach which would not diverge much from the path already laid out by Bernanke, and might even be more doveish.

In contrast, most of Summers’ recent comments have been on fiscal policy, where his advocacy for government intervention might infer a readiness to maintain Fed stimulus.

The Fed expects to scale back bond buying later this year and end the programme by mid-2014. It may want to consider delaying that wind-down, or even increasing purchases from a current $85-billion monthly pace, if growth disappoints.

A Summers’ Fed might resist extending the programme from worry it will not have much benefit, but carries mounting costs, which he hinted at the April conference by pointing to signs that emerging market credit “is starting to look a little frothy”.

That market subsequently has cooled substantially due to signals the Fed is nearing the point of reducing its purchases.

Furthermore, he has also signalled a gloomy view on how fast the economy can expand in the future without overheating, noting that the natural rate of unemployment may have risen and its potential rate of growth may have declined.

“To the extent that view is accepted, it should operate in the direction of leading one to expect the beginning of the tightening phase to happen sooner than is now supposed by many,” Summers told the invitation-only event in Santa Monica.

That hint of doubt in his mind about how much slack might be left in the economy if the jobless rate reached 6.5% could translate into a readiness to raise interest rates faster once the threshold is breached.

“He might be more likely than Yellen to support raising the funds rate target soon after the 6.5% threshold is met,” said Laurence Meyer at Macroeconomic Advisers. “We suspect that Summers might be inclined to raise rates more quickly than Yellen after the first rate hike,” the former

Single Page Format
Ads by Google

More from International

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...