Stocks and Bonds Rally as Summers Quits Fed Race
bySep 16th 2013 7:15AM
By Marc Jones
The U.S. dollar slid while bonds and shares rallied on Monday after the withdrawal of Lawrence Summers from the race to head the Federal Reserve suggested a more gradual approach to tightening monetary policy. Further whetting risk appetite were signs of progress in Syria following a Russian-brokered deal aimed at averting U.S. military action, all of which helped propel world shares to just short of a five-year high.
European bourses were already there as gains of 0.8 percent on London's FTSE and Paris's CAC 40 and 1.1 percent on Frankfurt's Dax lifted the FTSEurofirst 300 0.75 percent to follow up a strong day in Asia.
Summers' surprise decision came just before the U.S. central bank meets on Tuesday and Wednesday to decide when and by how much to scale back its asset purchases from the current pace of $85 billion a month. Investors wagered that U.S. monetary policy would stay easier for longer should the other leading candidate for Fed chair, Janet Yellen, get the job.
Markets had perceived Summers as less wedded to aggressive policies such as quantitative easing and more likely to scale stimulus back quickly than Yellen, who is currently second in command at the Fed. "Clearly the dollar doesn't like the idea it could be Yellen at the helm because of the interpretation that QE could be in place for longer," said Jane Foley, senior currency strategist at Rabobank. "The weakness of data more recently, the retail sales on Friday for example, has also bought home that we are still a little way from the U.S. having a resilient recovery ... so I think Summers's withdrawal has touched a bit of a raw nerve."
It was even possible a first Fed rate rise could be pushed out into 2016, rather than 2015 as currently planned, added Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. Going by Yellen's past speeches, he said she would most probably prioritize reducing unemployment.
"Yellen looks like the clear front-runner, and seems to be the public's popular choice," Rupkey said. "The Fed will shoot to lower the unemployment rate to the full employment level, and this means the new target could be more 5.5 percent, not 6.5 percent."