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 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