Is Larry Summers already tightening monetary policy
It is official - Larry Summers is now favorite to become the next Federal Reserve chairman at least according to the latest odds from the Irish bookmaker Paddy Power. Just have a look at the odds here. Over the last couple of weeks there has been a massive shift in the odds that Summers will become the next Fed chairman, while Janet Yellen seems to have been loosing ground. She is no longer the favorite to be picked for Fed chairman. The graph below from Zerohedge illustrates this very well. Another way of tracking the rise of Larry Summers is to have a look at Google Trends. Just have a look at the trend in Google searches for "Larry Summers" here. The general consensus is that Summers is likely to be more hawkish than Yellen if Obama indeed pick him rather than Yellen. In some sense this provides us with a real-time test of Market Monetarist thinking. At the core of Market Monetarist thinking is that we can basically "read" changes from changes in asset prices. Hence, if the dollar is strengthening, the yield curve is flattening and the US stock market is declining then it is probably a fairly good indication that US monetary conditions are getting tighter. So far, however, there is not very strong evidence from the markets are overly scared that Summer will be a lot more hawkish as Fed chairman than Yellen. That being said the US stock market has actually been flat-lining in the last couple of weeks. It might be a coincidence or it might be that equity investors are beginning to fear Summers. What do you think?