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Summers the odds-on favorite in bets for Fed chair; Yellen lags

Former U.S. Treasury Secretary Lawrence H. "Larry" Summers speaks during a financial and economic event at the London School of Economics (L
Former U.S. Treasury Secretary Lawrence H. "Larry" Summers speaks during a financial and economic event at the London School of Economics (L

By Ann Saphir

SAN FRANCISCO (Reuters) - Former U.S. Treasury Secretary Lawrence Summers has the inside track in the race to succeed Ben Bernanke as chairman of the Federal Reserve, betting at a popular online bookmaker suggests.

On Tuesday, Irish bookmaker Paddy Power offered odds of 1/2 for Summers. That translates to a view that Summers has about a 48 percent chance of being the next Fed chair, a spokesman for the firm said.

Fed Vice Chair Janet Yellen was priced at 2/1 against, meaning that successful punters would win two pounds for every one staked. Put another way, prices suggest Yellen has about a 24 percent chance at landing the top spot at the U.S. central bank.

At Paddy Power, there are 2,000 pounds at stake with 50 unique bets placed -- a small market compared with, say, bets placed on the name of the Royal baby or a standard football match, but a "decent size" market compared with other financial markets, the spokesman said.

For the world, far more rides on the outcome.

"Hundreds of billions of dollars, or more, you could easily say," said Karim Basta, chief investment strategist at $2 billion hedge fund III Associates. Picking Summers could mean more market volatility because his views on monetary policy are less well-known. "The market perceives Yellen as a much more of a known quantity," he said.

Bernanke's term ends in January next year, and his successor will have to contend with a still-fragile economy while likely also overseeing an end to the Fed's massive bond-buying stimulus program.

By 2015, if all goes as the Fed now forecasts, the central bank could start raising short-term interest rates in the world's largest economy. Rates have been held near zero since December 2008.

An aggressive advocate of the Fed's super-easy monetary policy, Yellen was the clear favorite earlier in the season to take over from her boss, with odds offered at 1/5 on June 30.

Summers' odds at that point were set at 8/1 against -- a payoff of eight pounds for every one pound staked for anyone willing to risk money on a long-shot.

Things changed in July, when U.S. President Barack Obama was reported to be leaning toward picking Summers, his former economic adviser. Summers, it was said, proved he could handle himself in a crisis, and may be more trusted by markets.

The revelation surprised economists and Fed watchers, who thought Yellen was the obvious choice.

In Yellen, currently the Fed's No. 2 policymaker, Obama could count on policy continuity. He would also be the first to put a woman at the head of the U.S. central bank.

Summers' detractors have come out in force, with some blaming him for laying the groundwork for the financial crisis by spear-heading financial deregulation in the late 1990s. Others say he had not been a strong enough advocate for fiscal stimulus to pull the economy from its crisis-induced free fall.

Summers' work as a consultant to large financial institutions he would oversee as Fed chairman has also drawn fire.

But at the betting parlor, the odds on Yellen, a longtime central banker whom Obama barely knows, lengthened. Summers' odds shortened.

On August 5, a few days after Obama defended Summers at a closed-door meeting with Democratic lawmakers, Yellen dropped behind Summers into second place and has lost ground ever since.

Late last week Obama said both Summers and Yellen were "highly qualified" candidates, but that he was considering others as well and would make his decision in the fall.

At his meeting in late July with House Democrats, Obama mentioned a third candidate, Donald Kohn, 70, who retired as Fed vice chairman in 2010.

Paddy Power is offering Kohn at 18/1 against, putting him in a distant fifth place, with about a 4 percent chance of success.

Roger Ferguson, 61, the chief executive of retirement fund manager TIAA-CREF who served as Fed vice chairman for seven years under Alan Greenspan, is currently the No. 3 pick, with odds against him offered at 12/1.

Former U.S. Treasury Secretary Timothy Geithner is No. 4, at 16/1.

A crackdown by regulators has put a damper on U.S. domestic betting on the outcome.

Intrade.com, another online betting parlor that catered to U.S. bettors and typically offered contracts on the outcome of races such as that for the Fed Chair, shut down in July due to financial irregularities.

(Reporting by Ann Saphir; Editing by Dan Grebler)

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