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Summers Fall

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Monday, September 16, 2013

The Larry Summers news is getting unusually warm reception in the market today, pushing stocks higher and treasury yields lower. Also helping the sentiment is the weekend deal about a diplomatic solution to the Syrian issue that effectively removes the prospects of U.S. military strikes.   

The market’s positive reaction to Larry Summers’ withdrawal from candidacy for Fed chairmanship reflects his perceived hawkishness. But this is likely a case of market perceptions rather than reality as there wasn’t much public trail to Mr. Summers’ monetary policy views. Janet Yellen, who is now the front runner for the position, represents continuity of current Fed policy given her long tenure at the central bank. My sense is that investors’ ovation of the move is more a function of less uncertainty about future Fed policy than any perceived Summers hawkishness.

The Summers news comes at the start of the week when the FOMC is expected to announce changes to the QE program. The consensus expectation is that the Fed will ‘taper’ its monthly bond purchases by $10 billion to $15 billion this week, but some are still hoping for the ‘taper’ decision to come later rather than sooner. Those hoping for a later ‘taper’ are concerned about the potentially destabilizing Congressional fight about budget and debt ceiling matters in the coming weeks. These are plausible points, but I strongly feel that the markets are ok with the start of QE taper this week and there is no reason for the Fed to hold back on this count.

Sheraz Mian
Director of Research

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