Markets will react to Fed policy, not appointments

Guest Column:
Justin Wolfers
President Barack Obama recently said that choosing the next chairman of the Federal Reserve is “definitely one of the most important economic decisions that I’ll make in the remainder of my presidency.” More

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OP-ED / LETTERS TO THE EDITOR

Markets will react to Fed policy, not appointments

Guest Column:
Justin Wolfers
Posted 8/19/13

President Barack Obama recently said that choosing the next chairman of the Federal Reserve is “definitely one of the most important economic decisions that I’ll make in the remainder of my presidency.”

But there’s one group that considers the decision largely inconsequential: investors in financial markets.

Last month Janet Yellen, the current vice chairman of the Fed, was the heavily backed favorite to get the nod on Irish betting site Paddy Power. By contrast, Larry Summers, the president’s former top economic adviser, was ranked the third-most-likely candidate.

Now, Mr. Summers is the solid favorite and Ms. Yellen has dropped to No. 2 among the oddsmakers.

How have financial markets responded to the (probabilistic) change? Let’s start with inflation expectations. After all, the inflation rate is the economic indicator for which a Fed chief is most likely to be held accountable.

Strikingly, inflation expectations have barely shifted, even as the fortunes of Mr. Summers and Ms. Yellen have reversed.

The movements in expected inflation, moreover, are tiny compared with those generated by even small shifts in policy about how the Fed would taper its asset purchases.

Who will it be? I don’t know. But I’m willing to wager that financial markets are right to bet that whoever it is will continue to deliver low and stable inflation. •


Justin Wolfers is a Bloomberg View columnist.

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