Tags: Gross | Yellen | risk | Summers

Pimco's Gross: Shift to Yellen as Frontrunner for Fed Chair Helps Risk Assets

By Dan Weil   |   Tuesday, 17 Sep 2013 09:22 AM

The ascension of Janet Yellen as frontrunner for Federal Reserve chairman now that Larry Summers has pulled out of contention is positive for risk markets, says Bill Gross, co-chief investment officer of Pimco.

It makes a difference "to the extent that markets prefer certainty over uncertainty, and that ratio shifted significant [Sunday] with the withdrawal of Larry Summers," Gross tells CNBC.

While in the past, Summers had expressed (negative) views about quantitative easing, his views about interest-rate policy going forward weren't known.

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By contrast, Fed Vice Chairwoman Yellen's views have been clearly laid out.

"The markets today [Monday] are reflecting a reduction of uncertainty," Gross notes. Both stocks and bonds rose Monday.

"Janet Yellen, she's not a slam dunk nominee, but it's going to be difficult for the president to introduce a new contender at this point," Gross contends. "I would say in the bond market and the stock market, go with Yellen with a capital 'D,' and that capital 'D' applies to dove."

Yellen has always been the frontrunner for financial markets and the Senate, he asserts, and she's likely more dovish than Summers is, who previously was a White House economic adviser.

The Fed has officially said that it likely won't raise the federal funds rate target until unemployment falls to 6.5 percent. But Yellen said in a speech three to four months ago that she's also going to look at the labor participation rate, the workweek, hours worked and wage growth as considerations too, Gross states.

"Now perhaps [at the Fed policy meeting] Wednesday we're going to see from [Fed Chairman Ben] Bernanke and perhaps from a Yellen influence, the introduction of an inflation minimum that establishes not only unemployment at 6.5 percent but an inflation minimum at 1.5 percent," Gross argues.

"That's a very dovish statement for Treasurys on the front end [of the yield curve] and a dovish statement for stocks as well."

And what happens if the Fed announces a beginning to the tapering of quantitative easing this week?

"I think all along that the taper hasn't been a dominant influence in terms of bond markets. The dominant influence is really the policy rate and the forward guidance," Gross adds.

"To the extent on Wednesday that we get a substantially increased and more firm policy guidance going forward in terms of where that policy rate will be, the markets will take heart."

Pimco has recently sold long-term Treasurys while buying three-year, four-year and five-year paper, Gross says.

"It's a front-end-yield-curve-friendly type of environment if Janet Yellen is the choice and we see forward guidance firming up in terms of [keeping short-term interest rates at historic lows] going forward," he explains.

A Yellen appointment might not mean any change for Fed tapering.

“There may be some thought in markets that this may delay tapering, given that Yellen is now the front-runner and she is more dovish,” Mark Zandi, chief economist of Moody’s Analytics tells Politico.

“But that will quickly fade. Yellen is cut from the same cloth as Chairman Bernanke and choosing her would signal continuity in monetary policy.”

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