What a QE Taper Means for Markets and the Next Fed Chair

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On Tuesday, Federal Reserve Bank of Chicago President Charles Evans announced that he wouldn't be surprised if the central bank begins to taper its $85 billion monthly bond-buying program in September.

Evans is the third official this week to signal a QE taper. Richard Fisher, president of the Dallas Fed, and Dennis Lockhart, president of the Atlanta Fed, parroted Evans' sentiment.

While Fisher indicated he would prefer to cut back bond purchases in August, Lockhart stated a preference for a September QE taper, although the Fed could wait longer if economic growth and unemployment trends reverse.

But it is Evans' announcement that is the most important. Evans is a member of the activist wing of the Federal Reserve. These members strongly support unconventional monetary policies such as bond buying, which are designed to reduce borrowing costs to spur aggregate demand and hiring across the country.

His views reflect those of the majority of members of the FOMC, the Fed's monetary policy committee.

"We are quite likely to reduce the flow of purchases rate starting later this year - I couldn't tell you exactly which month that will be - and it's likely to wind down over time in a couple or few stages," Evans told reporters.

Despite the signs the Fed will begin a QE taper, Evans said the central bank will continue to maintain low interest rates until unemployment falls below 6.5%, a feat that likely will not happen until mid-2015.

In the meantime, the era of cheap money will extend until GDP growth reaches 3%, a figure Americans would welcome given the stagnate economy of the last two years.

Wiggle Room in Baked Numbers

Even if unemployment falls, the data behind the jobless figures does not paint the picture of an economy improving its health.

The 7.4% unemployment figure has been driven by two hidden points of data that most Americans ignore: the rise of part-time employment and the outright departure of millions of Americans from the U.S. labor force.

According to Keith Hall, a senior researcher at George Mason University's Mercatus Center, 97% all job growth over the last six months has been driven by part-time employment.

And as part-time work has exploded, millions of frustrated Americans have given up on searching for work and therefore they are no longer included in the U.S. labor statistics. The worker participation rate fell again last month, to 63.4 percent in June. Had the labor force been the same size as it was in June 2009, when the recovery was announced, the official unemployment rate would be above 10%.

In addition, the Fed's suggestion of a QE taper has led to jitters across the market.

In June, Fed Chairman Ben Bernanke said in a speech that the bank could begin to taper its program "later this year" should the economy meet the Fed's expectations (1.7% GDP growth isn't setting the bar very high). As a result, the market dipped.

With Evans repeating QE taper talk, the markets again fell, and consumer goods stocks staggered.

It seems that the market will react to any reduction in free money from the Fed.

Would a QE Taper Signal a Summers Chairmanship?

It appears that one of the engineers of the financial crisis train wreck will now likely run the railroad. The announcement of potential reductions in the Fed's bond-buying program favors the chairmanship of Larry Summers over rival candidate Janet Yellen.

Despite a stunning resume of failure and reputation for championing the very anti-regulatory policies that fueled the financial crisis, Summers has been provided cover by the president, his former boss when Summers served as the president's chief economic advisor.

"He was the Rock of Gibraltar on trying to work through policies to turn the economy around," President Obama recently told House Democrats. "I'm not going to stand idly by and let his name be disparaged and his reputation trashed because people have a political agenda about who should or should not be the chairman of the Federal Reserve."

Summers has been somewhat skeptical of the bond-purchasing program, an important signal, given that the next Fed chairman will likely have to lead its exit. Of the two frontrunners, Summers would likely taper the Fed's quantitative easing more quickly than Yellen.

Nonetheless, Summers has argued for more direct stimulus, and that the government should use historically low borrowing costs to pay for more federal spending now, particularly on infrastructure, to boost growth.

Yellen, the current vice chair of the Fed, and co-favorite to replace Bernanke, remains the best forecaster in the building, but lacks the political influence to push her candidacy. She is also viewed as a dove, and has adamantly defended the bond-purchasing programs in the past.

One must question how both Summers and Yellen could coexist, if at all. Cumberland Advisors' David Kotok commented on Tuesday that the Summers candidacy could signal Yellen's departure in 2014. In addition to Yellen, the board could also lose up to four additional members, given the anticipated departures of Sarah Bloom Raskin, Elizabeth Duke, and possibly Jeremy Powell.

Bernanke does not plan to leave until his term ends in 2014. However, QE taper signals like those this week from Fed policymakers could provide a hint of who will take his job, and more importantly, how the markets will react in the next few months.

Larry Summers really, really wants to be the next Fed chairman. And it seems that President Obama is willing to grant his desire. We show you here why Summers is dangerous and a sop to the Big Banks.