Investors are increasingly seeking advice on how the potential nomination of Lawrence Summers as chairman of the Federal Reserve instead of Vice Chairman Janet Yellen might influence monetary policy and financial markets.
Inquiries about Summers’s chances “are picking up a lot,” said Matthew Benjamin, an analyst at Medley Global Advisors LLC in Washington, a firm that provides political intelligence to hedge funds. “Wall Street is very interested in this, and there is a perception that there is a difference between Yellen and Summers” in their approach to monetary stimulus.
Chairman Ben Bernanke’s term ends in January, and his successor may take over as the Fed pares back its monthly bond purchases of $85 billion, a prospect that has rocked financial markets from New York to Jakarta. Some investors say Treasury yields have risen in reaction to the possibility of a Summers nomination and could go higher.
“The market was comfortable with a Yellen appointment and is needing to grow comfortable with what a Larry Summers appointment might mean,” said Leo Grohowski, chief investment officer of New York-based BNY Mellon Wealth Management, which oversees more than $175 billion. “It’s one of the uncertainty factors that the market has to deal with that many, a few months ago, didn’t think we had to deal with.”
Interest rates on Treasury debt and mortgages have climbed since May 22, when Bernanke told the Joint Economic Committee of Congress that the central bank may begin tapering the pace of asset purchases, known as quantitative easing, at one of the Fed’s “next few meetings.”
The yield on the 10-year Treasury note rose to 2.75 percent yesterday from 1.63 percent on May 2, the lowest level of the year. The national average 30-year fixed-rate mortgage has risen to 4.51 percent from 3.35 percent in early May, according to Freddie Mac.
The U.S. bond market is facing its worst losses in at least 37 years. Through Aug. 28, the Bank of America-Merrill Lynch U.S. Broad Market Index was on pace for a 4.8 percent annual decline, the biggest loss since the index began in 1976.
The possibility of a Summers chairmanship has contributed to the increase in borrowing costs because he is seen as likely to end the Fed’s quantitative easing sooner than Yellen would, said Krishna Memani, New York-based chief investment officer of fixed income at Oppenheimer Funds Inc., with about $208 billion under management.
“Tapering with the prospect of a Summers Fed chairmanship clearly are the two big drivers of rates rising and the yield curve steepening,” said Memani.