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Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsWhy Stocks rose on Summers withdrawing his name
Stocks went up this morning in what was widely described as a favorable reaction to Larry Summers' decision to spend more time with his money.
For anyone who might have been puzzled by that, here is why...
In monetary policy, there are inflation "hawks" and inflation "doves."
Just like war hawks and doves, the type influences responses. Doves will support war in the most extreme circumstances and hawks will admit that some things don't warrant war, but a hawk is likelier to see a threat requiring action.
In Fed terms, war on inflation is conducted by making borrowing more costly, thereby contracting the economy.
The Fed has a dual mandate to seek price stability and full employment. Full employment is the lowest unemployment level that doesn't cause a bunch of inflation. It is probably somewhere in the 4%-5% range. The Fed reduces unemployment by making borrowing less costly, thereby expanding the economy
One would have to be close to insane to see inflation as a bigger problem than unemployment in our current economy.
A "dove" would need to really see a serious inflation problem before thinking about reducing Fed easing policy.
A "hawk" would be quicker on the trigger, and likelier to contract the economy preemptively or prematurely.
Stock prices benefit from easier money.
Wall Street, rightly or wrongly, perceived Summers as more "hawkish" than Yellen. Thus they perceive Yellen as offering less risk of reining in stock prices. (Or increasing unemplyment)
Since under current economic conditions ordinary Americans should also prefer a "dove" there happens to be no contradiction in main street and wall street wanting the same thing when it comes to future Fed policy regarding the tightness of money.
Aerows
(39,961 posts)breathed a sigh of relief that the financial markets wouldn't fail, and thanked God that they dodged the bullet that was Larry Summers in charge of any amount of money.
cthulu2016
(10,960 posts)Aerows
(39,961 posts)That made me laugh.
Agnosticsherbet
(11,619 posts)Last edited Wed Sep 18, 2013, 07:47 PM - Edit history (1)
If it's Yellen, Wall Street gets the Fed chief it wanted, not expected Steve Liesman CNBCsenseandsensibility
(17,108 posts)loves Yellen. I saw it on CNN, NBC, and I think Huffington Post. Kinda makes you wonder.
Katashi_itto
(10,175 posts)Choice is clear. Which makes me wonder if it wasn't a set up.