Breakout

Yellen vs. Summers: Traders Placing Bets on Next Fed Chief

Jeff Macke
Breakout

Markets hiccuped last week when the White House allegedly leaked the suggestion that Larry Summers and not Janet Yellen is the front runner to replace Ben Bernanke as the head of the Federal Reserve. The reaction was quick and unanimous: No one on either side of the aisle wants Summers.

The bond market in particular was appalled by the idea of a Summers tenure. Rates on the 10yr Note (^TNX) went from 2.52% to over 2.6% almost immediately after the rumors surfaced Tuesday night. They've since settled a bit but are still inflated.

Summers has been a noted skeptic of the Fed's quantitative easing measures. The possibility that he would immediately pull the plug on the buying program introduced even more uncertainty into a situation with plenty of it already.

Simon Baker of Baker Ave Asset Management says the White House is bluffing. "The White House floated the name out there clearly as a favor but even the liberal Democrats don't like him," Baker says in the attached clip. Summers is bombastic, opinionated and polarizing. Characteristics the FOMC really doesn't need.

Beyond just doing a favor for Summers, who's name hadn't been bandied about for any reason in quite a while, the idea that such a wild card could be in the running also served the purpose of making presumptive nominee Janet Yellen more palatable. Hawkish conservatives want QE to end but would rather not see a guy who's been on the wrong side of economic debates since 2009 come in and kill it in one fell swoop.

Baker says Janet Yellen is still the odds-on favorite to replace Bernanke, but traders figure to be twitchy about alternatives, if only because they're looking for an excuse to pull back anyway. There will be a consesus on the next Fed chief but apparently the White House isn't content to just let the transition from Bernanke to Yellen happen without a hitch.

The only winners may be traders who like volatility, and the briefly resurgent reputation of Larry Summers.

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