The Summers Effect: An Announcement Of The Next Fed Chief Could Overshadow The FOMC - Gallagher
Post date: Sep 13, 2013 1:41:52 PM
Japan's Nikkei newspaper says President Obama will name Larry Summers as the next Fed Chief after next week's FOMC policy meeting. Managing Director of Ideaglobal, Mike Gallagher says a Summers effect could be a bigger focus than the FOMC meeting itself and could well mean faster tapering.
LONDON, ENGLAND, UK (REUTERS) (SEPTEMBER 13, 2013) -JOURNALIST ASKING MIKE GALLAGHER: "This story on Summers, he may be nominated next week and you think this is as big a story, if not bigger, than the actual FOMC meeting itself."
MIKE GALLAGHER: "I think the market is really looking at Summers; and I think there's two senses. First of all, he's less enthusiastic about quantitative easing and that could mean a faster tapering. And secondly, he's not a big fan of forward guidance, and that that policy could be adapted or changed and providing less protection for US Treasuries. So although the big focus for next week is the FOMC in the coming months, given that the new Fed Chairman starts in January, the Summers effect if it's announced could be as dominant."JOURNALIST: "Well, we've already had a taster of what that Summers effect might be. Gold falling today at a one-month low. Treasury yields popping up slightly. Would you expect those trades and maybe a selling off of emerging markets to continue in the weeks ahead?"
MIKE GALLAGHER: "I think we've got to look at two time periods. The immediate aftermath of the FOMC meeting could see a little bit of a relief rally. The Fed are likely to do about a $10 billion tapering, but crucially they are likely to try and beef up forward guidance. That's going to be Bernanke's legacy. That may well prove a little bit of a relief rally for global markets generally for a week or so. But then as we get into late September and into the autumn, I think the dominant issue is going to be the fact of the Fed tapering itself and the asset flows which are going to be less prominent in US Treasuries. And I think we're heading for 3.25% yields into October for 10-year US."
JOURNALIST: "Would that 3.25%, would that be the top this year? If Summers is nominated, wouldn't it pop even higher?"
MIKE GALLAGHER: "I think the top isn't necessarily 3.25%. It's really a question of where end investors come in. And they didn't come in to 2.75%. They haven't really been evident at 3%. And I think 3.25%, it's questionable. So with the combination of a reasonable economic picture plus Summers coming in as Fed Chairman, we could actually pop to 3.5% later in the year."
JOURNALIST: "Okay, that's the Fed and Summers. Here in Europe, we have an informal Ecofin meeting today of European finance ministers. Greece and Cyprus likely to top the agenda. Do you agree that Greece will need more aid, and will that involve OSI, official sector involvement?"
MIKE GALLAGHER: "I think it's pretty sort of certain that Greece will need more aid and I think most parties agree on that. This is a top-up of their second loan program by approximately EUR10 billion covering the 2014 to 2016 period. This is likely to come through a combination of lower coupon payments and lengthening of official loans. However, there will be a fight about this when we get to late October into November. And I think we'd sort of be concerned that some shenanigans will sort of surround Greece over that time period."