Summers effect gives investors the jitters
The jitters even have some analysts betting that a Summers nomination could lead to slower economic growth, less job creation and higher interest rates than if the president named Janet Yellen, the Fed's vice chairwoman.
Businesses raising money and people buying homes and cars all have faced higher interest rates in recent months as the Fed's campaign to suppress borrowing costs has faltered. The rise in rates reflects optimism that the economy is gaining strength, and an expectation that the Fed will begin to pull back its bond buying program later this year. But analysts also see evidence of a Summers effect.
Many investors expected that Ms Yellen would be nominated to replace Ben Bernanke as head of the central bank, a choice that would have sent a clear message of continuity. Instead, investors are now trying to anticipate how Mr Summers might change the Fed.
The unease is the result of a little information and a lot of speculation. Mr Summers, a Harvard University economist who served for two years as Obama's primary economic adviser, has said little about monetary policy in recent years.
"People don't know what Larry might do," said Mohamed El-Erian, chief executive of Pimco, one of the world's biggest bond fund managers. "There's a lack of information on Larry's views. We don't have enough information to make an assessment, just some second- and third-hand accounts."
The President's top economic advisers uniformly support the selection of Mr Summers. They regard him as a creative thinker and an experienced crisis manager, qualities they value because they expect the Fed may confront difficult choices as it begins to retreat from its stimulus campaign.
They also insist Mr Summers supports the Fed's efforts to revive the economy and would continue those efforts. But Mr Summers has criticised the Fed's purchases of Treasury securities and mortgage-backed securities, warning that bond-buying on such a scale could distort financial markets. As a result, many investors suspect he would seek to end those purchases more quickly than Ms Yellen.
Julia Coronado, chief North America economist at BNP Paribas, said last week the yield on the benchmark 10-year Treasury note had started to rise as investors price in a Summers nomination. She said the yield could rise half a percentage point more than if the President nominated Mr Yellen.
She estimated this Summers effect would reduce domestic economic growth by a 0.5 to 0.75 percentage point over the next two years, which could reduce job creation by 350,000 to 500,000 jobs.
Frequently Asked Questions about this Article…
The term 'Summers effect' in the article refers to market unease driven by expectations that President Obama might nominate Lawrence Summers to lead the Federal Reserve. Investors are jittery because they worry a Summers nomination could signal a change from continuity under Janet Yellen, possibly leading to higher interest rates, slower economic growth and weaker job creation as markets try to price in his likely policy stance.
The article says markets have already seen higher interest rates in recent months and analysts believe a Summers nomination could push them higher still. Julia Coronado of BNP Paribas noted the 10‑year Treasury yield had begun to rise as investors priced in Summers, and she estimated the yield could be about half a percentage point higher than if Janet Yellen were nominated—raising borrowing costs for businesses and people buying homes and cars.
Many investors suspect he would. While the President's advisers say Summers supports efforts to revive the economy, the article reports Summers has criticized the Fed's large purchases of Treasury securities and mortgage‑backed securities as potentially distorting markets. That has led many to expect he might seek to end those purchases more quickly than Janet Yellen.
According to the article, Julia Coronado estimated a 'Summers effect' could reduce domestic economic growth by about 0.5 to 0.75 percentage points over the next two years and could lower job creation by roughly 350,000 to 500,000 jobs compared with a scenario in which Mr. Yellen was nominated.
Janet Yellen was widely expected to be nominated and viewed as continuity for Fed policy. By contrast, the article highlights a lack of recent public comments from Summers on monetary policy, producing uncertainty. Mohamed El‑Erian of Pimco is quoted saying there isn't enough information on Summers' views, so markets are speculating about how he might change Fed policy.
The article cites rising yields on the benchmark 10‑year Treasury note as one signal. Julia Coronado said the 10‑year yield had started to rise as investors factor in a potential Summers nomination, suggesting markets are adjusting expectations about future Fed policy.
The article quotes Mohamed El‑Erian, CEO of Pimco, saying there is too little information to fully assess Summers' views and that investors are relying on second‑ and third‑hand accounts. It also cites Julia Coronado of BNP Paribas, who quantified how yields, growth and jobs might be affected. The President's top economic advisers are reported to uniformly support Summers and describe him as a creative thinker and experienced crisis manager.
Based on the article, watch bond yields (especially the 10‑year Treasury yield), announcements about the Fed's bond‑buying schedule (Treasury and mortgage‑backed security purchases), and statements from the Fed or the nominee about monetary policy. The article links these signals to borrowing costs, economic growth and job creation, which are key factors for personal finance and investment markets.
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