Why the Stock and Bond Markets Are Glad Summers Is Out as Fed Chief Candidate

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The logic behind why Larry Summers withdrew himself as a candidate to be the next Federal Reserve chairman is mixed, even with him issuing a letter explaining that he did not want to create a long replacement process. This likely leaves Janet Yellen as a front-runner, but it also opens the door to other candidates. What is obvious and what is known is that the stock market and bond market are relieved that Larry Summers is out. 24/7 Wall St. wanted to give a bit more detail on the “why” so that the public can understand one more “how-to guide” when it comes to their finances.

The real issue is that Larry Summers was expected to signal an end to the quantitative easing (QE) measures and endless bond buying. In short, many thought Larry Summers would jump-start the dawn to higher interest rates. Whether QE2 or QE-whatever should really end sooner rather than later boils down to what your expectations for the consequences of keeping rates this low are in the long term.

What we find interesting is the response our readers, back in late July, gave in a poll on the matter. Out of some 117 responses, the vote was only 25% for Larry Summers. Janet Yellen took in 73%, and another 3% of the votes were nonsensical “other” comments, which were not really on topic.

24/7 Wall St. believes that keeping rates too low artificially for too long creates serious damage in the long term. It punishes investors and forces them into more risks. It also allows the government to fund its many trillions worth of debt much cheaper. The good news for the public is that it makes financing on things like mortgages, auto loans, student loans, credit cards and personal loans come with lower interest rates.

Again, we will leave the vote on the “for better or worse” impact of quantitative easing up to you. What is undeniable is that equity investors love economic stimulus. If Janet Yellen now will be the front-runner, then it seems that the Ben Bernanke era of low interest rates and very accommodating stimulus likely will continue. Even if QE comes to an end, the markets just assume that Yellen will revert back to the same blueprint if the economy were to turn back to a recessionary climate.

Stocks already were seeing a good rally, but another 160 points on the Dow Jones Industrial Average and another 14 points on the S&P 500 Index is proving that the equity markets are glad to have Summers out of contention. The 10-year Treasury yield was at 2.90% at the end of last week, and now it is down to about 2.80%. It seems like the stock and bond markets are both looking and hoping for the new Fed chairman to continue a period of low interest rates and easy money over someone who wants higher interest rates. To prove another example in gold, which loves the easy money under QE-infinity, the shiny yellow metal is down more than 0.5% on the Summers exit.

Here is Janet Yellen’s pedigree, although we would point out again that it seems more than possible that President Obama will consider other candidates as well:

Dr. Janet Yellen is already the Vice Chair of the Federal Reserve. In 2010 when she became Vice Chair, she began a 14-year term as a member of the Board that will not expire until way out: January 31, 2024. She previously served as President and CEO of the San Francisco Federal Reserve Bank. Yellen also served on the Board of the Fed in the 1990s. She is Professor Emeritus at the University of California at Berkeley and has been on the staff there since 1980. She also chaired the Economic Policy Committee of the Organization for Economic Cooperation and Development (OECD) from 1997 to 1999, and she is a member of the Council on Foreign Relations and also the American Academy of Arts and Sciences.