17 Sep 2013

One-horse race likely for US central bank job

1:11 pm on 17 September 2013

Larry Summers' withdrawal from the battle for the top job in world economics has left it looking like a one-horse race.

The Wall Street Journal on Monday reported Mr Summers, the former United States Treasury Secretary, had withdrawn from the race to succeed Ben Bernanke as chair at the Federal Reserve.

The newspaper cited a letter from Mr Summers to US President Barack Obama in which he said the likelihood of an "acrimonious" confirmation process, had he been appointed, was the reason for stepping aside.

Janet Yellen, vice-chair of America's central bank, is now seen as the main contender to take over as chair.

Harbour Asset Management director and head of fixed income Christian Hawkesby said Ms Yellen had been a strong advocate of the bank's stimulus measures in her current role.

"So she's really seen as the candidate for continuity in the policies coming from the US Federal Reserve and continued loose monetary policy, interest rates lower for longer," Mr Hawkesby said.

The flow-on effect for New Zealand would be a weaker US dollar, leaving our economy looking "relatively strong" in comparison.

"So you'd expect to see Yellen becoming the main candidate as being a positive influence for the New Zealand dollar relative to the US dollar, Mr Hawkesby said.

"It's as much about the competition of stimulus around the world. You're likely to see the New Zealand dollar relatively higher than it would have been otherwise but potentially global interest rates relatively lower, so those parts of the economy that are leveraged off long-term interest rates in particular are potentially better off."

Other contenders could emerge

The news of Mr Summers' withdrawal pushed the New Zealand dollar up US1c on Monday morning and also helped the share market gain nearly 1%.

ANZ Bank foreign exchange manager Sam Tuck said the market was quick to price events as they happened, and warned other contenders could emerge.

"... for instance, there was the old Bank of Israel governor Stanley Fischer. He's been mentioned as an outside possibility," Mr Tuck said.

"So whilst the market is relatively comfortable with Yellen, there's still the possibility of another name entering the fray, as there was before when it seemed to be that the market was set on Summers and Yellen as the two potential candidates."

Former US Treasury Secretary Timothy Geithner has also emerged as a possible contender. He has said he does not want the job but former White House adviser Pippa Malmgren says the White House could persuade him.

The Federal Reserve would meet on Wednesday, when it was expected it would start to remove its monetary policy accommodation in a process known as tapering.

Mr Tuck said he expected the market would "fairly quickly turn back" to focussing on that meeting.