Why Markets Went Up With Larry Summers Out Of Fed Chair Running
ROBERT SIEGEL, HOST:
It is the rare man who can move markets by withdrawing from consideration for a job. But that's what Lawrence Summers has done by withdrawing his name from consideration as the next chairman of the Federal Reserve. Summers has been a controversial figure, both in Washington and at Harvard. But the reaction here isn't just about his personality. He is associated with some ideas about monetary policy that evidently, rattle investors these days.
Joining us to explain what the markets read into Summers' announcement is an expert in the stock market, professor Jeremy Siegel of the Wharton School at the University of Pennsylvania. Welcome to the program once again.
JEREMY SIEGEL: Thanks for having me.
ROBERT SIEGEL: And what is it about Larry Summers that was so unpopular on Wall Street, and in stock markets around the world, that they go up at the prospect of his not being the Fed chairman?
JEREMY SIEGEL: Well, it's more that Janet Yellen, who I now believe is the overwhelming front-runner, has been very warm to the - Bernanke's policies and quantitative easing. It is not so much that Larry opposed them, but he was cooler and had expressed some doubts at some point that that was a major, important policy initiative.
ROBERT SIEGEL: You're talking about the current Fed Chairman Ben Bernanke's policy of QE, quantitative easing, which is - in a nutshell, how would you define quantitative easing?
JEREMY SIEGEL: Well, quantitative easing takes effect when short-term interest rates have been driven to zero. In other words, the standard traditional target of the Federal Reserve is the federal funds rate. Once they get to zero, they can't drive it any lower. Zero is the natural lower bound.
ROBERT SIEGEL: They can't cut interest rates any further.
JEREMY SIEGEL: They can't cut interest rates any more, certainly on the short end. So then new, nontraditional policies have to take effect. And one of them is the provision of large quantities of reserves - excess reserves, as it turns out to be - to the banking system so they do not feel constrained in lending. And that is what quantitative easing is. It's the buying of bonds, and the provision of reserves to financial institutions, so that they will lend more freely. And that is the policy that the Fed is now following.
ROBERT SIEGEL: To the tune of about $85 billion a month, I gather.
JEREMY SIEGEL: That's correct. And they have actually purchased more than $2 trillion worth of bonds since the financial crisis. So that is an awful lot of liquidity. But so far, it has been absorbed in the marketplace without inflation, as we see. So that is a good combination.
ROBERT SIEGEL: This is Ben Bernanke's policy. Janet Yellen is the vice chair of the Fed. She's very closely associated with this policy. Larry Summers, so far as I can find, said back in April, and I quote, "QE - quantitative easing - in my view, is less efficacious for the real economy than most people suppose." And then he went on to say, "But if QE will not have a large effect on demand, it will not have a large effect on inflation, either." It's - very guarded remarks in his...
JEREMY SIEGEL: Yes, it's not a negative remark. But it's certainly - it is not, in any case, an enthusiastic endorsement of the policy which Bernanke and Yellen have strongly supported.
ROBERT SIEGEL: You are a great advocate of investing in stocks. And doesn't a day like this - (Laughter) - based on your own description of how squishy the difference is between two people to be the Fed chairman, and how that can send the Dow up a hundred points and more, doesn't that make you wonder how rational, or senseless, the equity markets are?
JEREMY SIEGEL: Well, in the short run, I am not going to deny that they are very volatile; and any little hint at one direction or another will move the market a hundred points at a time. But over time, the market does move according to economic fundamentals, and they will prove out in the long run. And I think that's one reason why I've been so supportive of stocks.
ROBERT SIEGEL: Jeremy Siegel, a professor of finance at the Wharton School, thanks for talking with us once again.
JEREMY SIEGEL: Happy to be with you.
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