For weeks I've been saying that fear of Summers has been hurting the stock market. Commenters keep responding with a Justin Wolfers analysis that found markets didn't care about Fed decision:
President Barack Obama recently said that choosing the next chairman of the Federal Reserve is "definitely one of the most important economic decisions that I'll make in the remainder of my presidency." The financial media appear to agree, devoting hundreds of column inches to speculation. Senators, overseas pundits and even Bette Midler have chimed in.
But there's one group that considers the decision largely inconsequential: investors in financial markets. At least, that's my initial reading of a revealing natural experiment.
I can't imagine why they'd accept the views of a famous Ivy League professor over my opinion, but they did.
In any case, Steve just left this message in the comment section:
S&P 500 futures gap up 17 points…
And Reuters confirms the story:
SYDNEY (Reuters) - The U.S. dollar slid while bonds and shares rallied in Asia on Monday after Lawrence Summers dropped from the race to be head of the U.S. Federal Reserve.
Investors wagered that Fed policy would stay easier for longer under the other main candidate, Janet Yellen.
. . .
"This move would be consistent with the market re-pricing to reflect a strong probability that Janet Yellen becomes the next Federal Reserve chair."
The reaction was immediate with the euro jumping over half a U.S. cent to $1.3367 in early trade, its highest in almost three weeks. The dollar likewise slid half a yen to 98.85 and dropped on sterling and the Swiss franc.
Liquidity was somewhat lacking with Japanese markets closed for a holiday on Monday.
Stock futures for the S&P50 mini index climbed 1 percent to 1,705.25, likely setting up a firm start for Asian bourses as well.
In debt markets, futures for the U.S. Treasury 10-year note leaped over a full point, a sizable move for Asian hours, as investors took yields lower.
The more distant Eurodollar contracts rallied sharply as the market pared back expectations for how quickly the Fed might finally start to tighten, as opposed to just tapering its stimulus. Contracts from late 2014 out to 2016 all enjoyed double-digit gains.
Keep in mind that after Senator Tester became the fourth Dem on the Senate Banking Committee to oppose Summers the writing was on the wall. That means the 1% jump in stock prices is a gross underestimate of the damage Summers would have done as Fed chair. Much of this was already priced in.
I feel like we dodged a bullet.
God I love seeing financial markets respond to monetary policy news. Now let's see the Fed do something exciting on Wednesday. And for God's sake, let's get an NGDP futures market up and running.
Update: Taking into account the fact that there was already some expectation Summers would drop out, I'd guess his decision created upwards of a trillion dollars in new global stock market wealth. Not bad!
Monetary policy is really, really important.