Traders bet on later Fed rate hike with Summers out of picture

Traders are betting the Federal Reserve will keep policy easier for longer now that former Treasury Secretary Lawrence Summers is out of the running to succeed Ben Bernanke as chairman of the U.S. central bank. Summers was widely regarded as likely to be more "hawkish" than Janet Yellen, also a candidate for the Fed position.

By Ann Saphir
September 16, 2013 11:54 AM ET
MSN Money

Traders are betting the Federal Reserve will keep policy easier for longer now that former Treasury Secretary Lawrence Summers is out of the running to succeed Ben Bernanke as chairman of the U.S. central bank.

Summers, a former top aide to President Barack Obama, was widely regarded as likely to be more "hawkish" than current Vice Chair Janet Yellen, who was also a candidate and is now deemed the new front-runner. Obama has also said he was considering former Fed vice chair Donald Kohn to succeed Bernanke, whose second term expires in January.

Traders now give a 55 percent probability of the first rate hike in December 2014, and 68 percent chance in January 2015, according to CME Group's Fed Watch, which generates probabilities based on the price of federal funds futures traded at the Chicago Board of Trade. On Friday, traders saw a better-than-even chance of the first increase in October 2014.

Summers' withdrawal on Sunday came in the face of mounting opposition from within Obama's own Democratic Party. On Monday, U.S. short-term interest rate futures rose as traders shifted away from bets on Summers and toward Yellen, seen as a more dovish policymaker.

"Summers was viewed by the market as someone who would remove accommodation more quickly. He was pretty much priced in," said John Brady, a managing director at Chicago-based RJ O'Brien.

"It's the Fed chairman recalibration trade."

Four Democratic senators on the Senate Banking Committee were expected to vote against Summers if he had been nominated by the president.

The most recent statement of opposition came from Montana Senator Jon Tester on Friday after markets closed. Tester is a centrist Democrat and his opposition provided a strong signal of the uphill climb a Summers' nomination would have faced.

Summers' decision to withdraw from consideration was welcomed on Wall Street, where analysts said it removed the uncertainty a bitter battle over the Fed chairmanship would have caused. Stocks were trading higher.

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