Summers Over.

16th September 2013

Ian Copelin, Investment Director, my wealth, comments “Federal Reserve policy makers meet this week (17-18 September) to decide whether the economy is strong enough to begin tapering their $85bn in monthly bond purchases – market participants are expecting a tapering of between $10-$15bn, leaving QE at $70-$75bn per month.

However, 10-year US Treasury yields have jumped almost 1 percentage point since May, when Ben Bernanke, the Fed Chairman, said the central bank could “take a step down in our pace of purchases” in the “next few meetings”.

Consequently, this has pushed up the interest rates on new mortgages and slowed the housing market revival (mortgage applications and new home sales have weakened markedly recently), which in turn could weaken the US economy.

This coupled with news over the weekend that Lawrence Summers, who served as Treasury Secretary under President Bill Clinton and was President Barack Obama’s economic adviser in his first term, withdrew as a candidate to become the next Federal Reserve Chairman could mean this month’s tapering could be a lot less than current market expectations.

Lawrence Summers was President Barack Obama’s clear favourite and consequently the market had assumed, and was starting to price in the fact that Summers was going to get the Fed chairmanship: he was seen as much more hawkish than other potential candidates as he indicated that he would undo the bank’s policies aimed at holding down borrowing costs and was expected to raise interest rates sooner than other candidates.

My interpretation of these events is that it significantly increases the probability of broad policy continuity at the Fed, especially as the Fed Vice Chairwoman Janet Yellen is now the likely to get the job. Therefore to keep bond yields from rising any further and threatening US economic growth, I am expecting the Fed will re-emphasise their message that the benchmark interest rate is likely to remain low.”