SIEPR Economic Summit 2010
Tony Avelar, Getty

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."

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The stock market is not always in sync with the economy. It looks six months in advance. What the market is telling us is that though the economy is not racing ahead it is moving in the right direction. The fed will be very slow removing quantitative easing so as not to derail the baby steps...and if there is a negative reaction then they will adjust accordingly.
What people often mistake is that they think that the market should be in lock step with the economy which does not often occur. Interest rates are rising because of a slooooooooooowly improving economy. You can invest in equities (stay away from bonds) but keep an eye on them (I invest in mutual/etf funds because I am not a skilled stock picker and the volatility inherent in individual stocks). A little inflation if fine...but if it gets out of hand look for the exit door. You can never invest then forget it....those who do that will face the cliff fall they suffered in 2008.

September 16 2013 at 12:16 PM Report abuse rate up rate down Reply

Too bad that Summers bowed to pressure. He would have done a exellent job. Tappering Must begin soon or its Consequences will be Grave to the Economy. Expect Extremely high inflation by next Spring as a direct result of Trillions of Worthless notes that were printed over the last 4 years. Similar to what Germany had done in the 1920s, The Dollar will be completely wortless by fall of next year. The Fed should have remained on the sidelines as All will soon see

September 16 2013 at 11:20 AM Report abuse -3 rate up rate down Reply

I truly do not understand why the stock market is doing so well. It makes no sense using historical economic theory. The GDP is growing slowly. Jobs are barely growing (the unemployment rate is a false number, i.e., the number of people working full time jobs in the US has decreased over recent years). The national debt is growing exponentially. Quantitative easing (creating new money out of thin air) should make people afraid instead of making them push the stock market prices farther up. The whole world is in a similar position economically, on the verge of collapse.

September 16 2013 at 10:49 AM Report abuse +4 rate up rate down Reply
Roger Patch

summers is a very wise man....we will see where he goes next

September 16 2013 at 10:47 AM Report abuse rate up rate down Reply

Beware, the Stock Market Bubble!

September 16 2013 at 10:30 AM Report abuse +4 rate up rate down Reply

I am amazed the market Rallys over nothing! For the past year I was hearing how it is overvalued due to Fed printing. Now - in the face of the Fed's stoipping printing - it rallys again. I believe the new name for the Stock market is the Stuck market. Wall Street and main Street have very little in common these days.

September 16 2013 at 9:43 AM Report abuse +1 rate up rate down Reply