In the middle of the night
this past Friday, the price of gold quickly dropped on a report in the Japanese business newspaper Nikkei that the White House had decided to appoint Larry Summers as the next Fed chair and that the announcement would likely be made next week.
The White House later denied the report, but the implication of the market’s reaction is clear: Larry Summers is viewed as the “hawkish,” tight-money alternative to Janet Yellen, and as such, that should mean a strong dollar and weak gold.
But this hawkish vs. dovish dichotomy is not really that useful. At least in the current context, neither is expected to have a meaningful impact on the future of Quantitative Easing (the wind-down process of which is likely to begin before either would take the top job) and both would likely extend zero interest rates for a long time.
So what makes Yellen the superior choice?
In a post in July, Cardiff Garcia made the case for Janet Yellen, and included one sentence which has really stayed with us:
Not that Yellen can predict the twists and turns of the economy with perfect clarity — nobody can — but rather she has consistently shown a deep early understanding of the underlying pressures building in the economy and the scale of their potential consequences.
This is true.
In the late ’90s, Janet Yellen was worried about the economy overheating. This was thoroughly discussed in Lawrence Meyer’s book, “A Term At The Fed.”
In the mid-2000s, Yellen was worried about the housing bubble, and the impact of a bust.
Post-crisis, Yellen has recognised that inflation is the least of our problems, and that everything the Fed does should be oriented towards addressing the unemployment problem. (Hence the “dovish” reputation.)
This shows a flexibility of thought and an ability to recognise what the key issues of the moment are that would make her a prime Fed chair.
Yes, Yellen seems to believe in the power of monetary policy to address the current malaise a bit more than Summers does, so that’s one reason to call her dovish. But Yellen’s excellent understanding of “underlying pressures building in the economy” is what makes her stand out.
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