Markets are thrilled Larry Summers won’t be Fed chair

   < < Go Back
from The Washington Post,

Since news broke Sunday afternoon that Larry Summers has taken himself out of the running to lead the Federal Reserve, the reaction in financial markets can only be described as elation.

The Standard & Poor’s 500 index opened Monday morning up 0.9 percent, and the Dow Jones industrial average up 155 points. Bond markets rallied, as well, with 10-year interest rates falling from around 2.9 percent Friday to 2.79 percent Monday morning, and the dollar fell against other currencies.

Here’s the S&P from Friday’s close to Monday’s open:

What is going on here? The answer that Wall Street analysts are coming up with is simple: Call it the Yellen Rally. It now looks like Janet Yellen, the Fed’s vice chairwoman, is the most probable candidate for the Fed chairmanship, and she is viewed as more dovish, or soft on inflation, than Summers. That would imply that the Fed would keep interest rates lower for longer, and would choose a more gradual wind-down of its bond-buying program.

There may be another factor involved, however, particularly in the rally in the stock market and other risky assets. The prospect of a Summers nomination had put a pall of uncertainty over markets. Allies of the former Treasury secretary had argued that his approach to monetary policy would be broadly consistent with that of the central bank under Fed Chairman Ben Bernanke and Yellen, and certainly that he would have been in no hurry to unwind easy money policies.

But what was actually known about a Summers nomination was this: His Senate confirmation would have been polarizing and contentious, with the outcome in the air until the final vote count. And his views on monetary policy have largely been kept secret, at least in any on-the-record setting.

So, it’s not just that Yellen may kinda-sorta be more dovish than Summers. Markets are rallying because the prospect of months of being whipsawed by uncertainty over the Fed’s future direction have diminished.

More From The Washington Post: