UBS economist Drew Matus says that now that former U.S. Treasury Secretary Larry Summers has withdrawn his name for consideration as the next chairman of the Federal Reserve, all of the other potential candidates’ odds have gone up — including current Fed chairman Ben Bernanke’s (emphasis added):
Although Summers’s withdrawal from the race for the Federal Reserve Chair increases the odds that Vice Chair Yellen will get the nod from the President (which has been the UBS economics call from the start), it is by no means a guarantee. His withdraw also increases the odds of a compromise candidate such as former Fed Vice Chair Ferguson (a money manager, PhD Economist and a JD who may be better able to manage the new regulatory powers the Fed possesses) or former Fed Vice Chair Kohn (a career Fed official who has “seen it all”).
Alternatively the President could look to Christina Romer (former Chair of the Council of Economic Advisors and, perhaps more importantly, a political ally) or even look to former Treasury Secretary Geithner, who is reportedly advising on the search process (but who may want to continue on the lecture circuit). It also increases the odds that the President may ask Chairman Bernanke to stay on (although it seems unlikely that Chairman Bernanke would appreciate being asked to forestall his departure).
Another Bernanke term is not a scenario you hear many people talking about.
Markets, Matus writes in a note to clients, still prefer Yellen the most, though.
“However, this has always been the case and the President was willing to ignore the “obvious” choice to place an ally at the helm of the Federal Reserve,” says Matus. “It is unclear to us whether the President will choose to heed the market (and Democratic Senators’) call for Yellen or whether he will now move beyond the two candidates to avoid choosing the candidate he initially did not prefer.”
Regardless of who President Obama chooses to nominate, implications for the market may not be all that different from candidate to candidate.
“Perceptions of hawkish or dovish tendencies of the new Fed Chair may overstate the actual importance of a Fed Chair’s desires in the new framework Bernanke has crafted,” says Matus. “Assuming we are correct and the initial tapering of quantitative easing is announced on Wednesday, the new Fed Chair will take office only after four months of tapering have occurred. Once seated, they will still face constraints regarding future policy decisions from the FOMC’s threshold guidance around unemployment and the first interest rate hike.”