What the rally on Summers' withdrawal says about market psychology

09/16/2013 3:51 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

A losing team changes coaches and suddenly starts to win. A company replaces its CEO and its stock suddenly moves up. Lawrence Summers withdraws his name from consideration to replace Ben Bernanke as chairman of the Federal Reserve in January and global financial markets rally.

As of 3 p.m. New York time today the Standard & Poor’s 500 stock index was up 0.54%. The German DAX closed up 1.22% today and Hong Kong’s Hang Seng finished up 1.47%. The 10-year U.S. Treasury traded to yield 2.87%.

There’s certainly an element of personal judgment in these moves. Summers has a reputation for intellectual brilliance and arrogance that led to well-reasoned worries that he would not be able to build consensus at the Fed

But mostly the markets’ move upwards is relief that someone who had come, rightly or wrongly, to embody the possibility that the Fed would move aggressively to “normalize” its balance sheet and interest rates, won’t be in charge of the U.S. central bank.

Summers worried global financial markets not just because he might have moved more quickly to end the Fed’s buying of Treasuries and mortgage-backed securities than Bernanke would have if he had remained in charge of the Fed, but also because he might have pushed to raise short-term interest rates, now at 0% to 0.25%, to something like a more normal 1%.

Global financial markets may not like the idea that the Fed is about to start tapering off its buying program. But the markets are really, really afraid that the Fed won’t hold short-term rates at their current extraordinarily low levels until 2015 as it has promised.

The take away lesson from the markets’ reaction to the Summers withdrawal is how close to the surface the markets’ worry about an early Fed tightening is. The real threat to the markets, this reaction says, is not Wednesday’s Fed decision to taper/not to taper but an easy tip in market psychology into worry about tightening--even on very little or no objective evidence that the Fed is about to move in that direction any time soon.

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