Markets Edge Higher following Yellen’s comments 3/21/14

U.S. equity markets finished the week higher amid optimism that the Federal Reserve will maintain their accommodative stance and continued signs of strength in the U.S. economy.  Asian and European markets also edged higher, led by the largest gain in five weeks in China’s Hang Seng Index, which rose 1.20% overnight.

Credit rating agency Fitch reaffirmed their AAA rating on U.S. debt and said the outlook remains stable on the full faith and credit of the U.S.  Fitch also downgraded Russian debt and stated the outlook remains negative as Russian President Putin signed documents to annex Crimea this week. 

Sales of existing homes declined last month to the lowest level since 2012. This is probably attributable to the harsh weather and the limited supply of homes for sale.  However, median home prices continued to climb as the price of an existing home rose 9.1% over the past year to $189,000.

Interest rates in the U.S. had their biggest weekly increase in nine months this week following a press conference by new Fed Chair Janet Yellen.

Yellen was very transparent in her first address as the new Fed Chair.  She was perhaps too direct when she was asked what the FOMC meant by “considerable time” for maintaining the current target range for the federal funds rate after the asset purchase program ends. Yellen defined considerable time as 6 months.  

The FOMC also announced a reduction in their monthly bond purchase program by another $10 billion to $55 billion, which fell in line with analyst projections as Fed officials have been stressing the continued path of this tapering process.

Yellen stated that the harsh weather conditions made assessing the strength of the overall economy “especially challenging”.  Economic data since early January has been slightly lower than expected, partly due to weather and partly due to normal adjustments.  The FOMC also sees a substantial slack in the labor force and understands that the unemployment rate is a good indicator, but does not provide the whole picture. 

Yellen suggested that the FOMC will shift guidance towards more qualitative measures from the prior quantitative approach used by former Fed Chair Ben Bernanke.  Bernanke pegged an unemployment rate of 6.5% as the threshold to begin tightening credit.  Yellen began to walk back this stance by saying the FOMC “will take account of a wide range of information, including measures of labor-market conditions, indicators of inflation pressures and inflation expectations, and reading on financial developments” in deciding when to raise rates.  The initial knee-jerk market reactions to Yellen’s comments were negative as both the bond and stock markets declined due to fear that interest rates will rise sooner than expected.  However, financial markets stabilized soon after as investors digested Yellen’s overall message that the Fed will continue to maintain its accommodative stance this year and that the federal funds rate is not expected to change anytime soon. 

 

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