After Fiscal Mess, Uncertainty Concerning Monetary Policy is Coming in US

According to FT, Larry Summers, which is now seen as the front-runner to replace Fed Chairman Bernanke, made dismissive remarks about the effectiveness of quantitative easing at a conference in April, raising the possibility of a big shift in US monetary policy.

 

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“QE in my view is less efficacious for the real economy than most people suppose,” said Mr Summers according to an official summary of his remarks at a conference organised in Santa Monica by Drobny Global, obtained by the Financial Times.
 
Mr Summers – who served as President Barack Obama’s chief economic adviser from 2009-2010 – has seldom spoken in public about monetary policy. Markets have little sense of his current thinking and may be surprised by his apparently hawkish stance on QE.

 

The disclosure of his remarks comes as the race for the Fed chairmanship is widely regarded as being between Mr Summers and Janet Yellen, the current Fed vice-chair, who has been an architect of its QE policies. The fact is that even if even Larry Summers seems to be backed by President Barack Obama, that’s not the case for a number of US Senate Democrats who sent a letter supporting Janet Yellen as the next Fed Chairman.

 

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A number of US Senate Democrats are circulating a letter supporting Janet Yellen to be the next chair of the Federal Reserve in an ominous sign for supporters of Larry Summers.
 
The letter has been pushed by Sherrod Brown from Ohio, Senate officials said, one of the chamber’s leading liberals and a longtime critic of financial deregulation and trade liberalisation.
 
Signatories include Tom Harkin of Iowa, and Dianne Feinstein of California.
 
Senate officials said a single copy of the letter had been circulated to the chamber’s 54 Democrats. It is not known how many senators have signed the letter.

 

The second story shows that there could be some tensions in the Democrat Party in a context where President Barack Obama will confront with lawmakers (after a long August holiday) on a daunting list of decisions affecting the economy (“continuing resolution”, 2014 fiscal budget, fiscal consolidation plan and debt ceiling) and therefore will need the full support of his party. If he remains isolated and unable to find a compromise with Republicans, automatic, across-the-board budget cuts of $109 billion, could entry into force on October 1st.

 

In the meantime, if Larry Summmers is chosen, it could apply a less accommodative monetary policy which could increase uncertainty and the fear of a return into recession.