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Indeed, analysts have been rushing out estimates of how much tighter monetary policy will be, down to the second decimal place, if Larry Summers is appointed as Fed Chairman. We think the scaremongering is way overdone. A careful read of Summers’ speeches and interviews highlights that he is far from a hawk. Yes, he is concerned about structural unemployment, but only in the same way that Chairman Bernanke and Janet Yellen are concerned – a lack of demand today threatens long-term economic performance. If demand growth stays too weak for too long, it damages the long-term growth prospects by reducing capital spending and causing higher structural unemployment as skills erode in the labor market.
This view suggests that if appointed, he would err on the side of more stimulus, not less. In Summers view, policy should by extremely stimulative now in order to boost demand and avoid the potential long-term problems.
Bottom Line: Those analysts factoring in significantly tighter policy under Summers than under Yellen are off the mark. Still, Summers’ appointment would keep volatility elevated until he is able to challenge market perceptions and provide visibility on his policy bias once he is on the FOMC.
This post was originally published by the BCA Research blog.