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It's here! Say hello to the Yellen put
11/18/2013 7:38 pm EST
In her November 14 testimony before the Senate Banking Committee, Janet Yellen, who President Obama nominated to succeed Ben Bernanke as chairman of the Federal Reserve on October 9, made it clear that she’s even more cautious about moving to slow the Fed’s monthly purchases of $85 billion of Treasuries and mortgage-backed securities than Bernanke
She repeated the Fed’s existing focus on reducing unemployment to something like 6.5% (from the current 7.3% rate) before the central bank began any taper in its purchases. The financial markets have recently started to fret that this focus wasn’t enough to guarantee that The Taper wouldn’t start in December or that the Fed would keep short-term interest rates near 0 until 2015. And that has led to some fraying of the Bernanke Put—a belief that if the economy or financial markets stumbled, the Fed would step in.
But what the financial markets heard in the first stage of Yellen’s confirmation hearings was an even stronger endorsement that of the Put than they’d heard from Bernanke.
Yellen added strong comments indicating that the Fed is worried that inflation is so low that it has raised fears at the central bank that the economy could slip into deflation. In the United States the consumption expenditures price index, the Fed’s preferred inflation index, is up only 0.9% for the 12 months through September. And inflation is low in pretty much all the world’s developed economies at 1.2% in Germany, 0.8% in Italy, and 1.3% in Spain, for example.
Yellen also said, in answer to questions from the committee, that she didn’t believe that the Fed’s additions to the money supply had created a bubble in stocks or other assets.
All that—especially her comments on the lack of a stock market bubble—was music to the market’s ears and stocks finished the week on a renewed confidence with the Dow Jones Industrials and the Standard & Poor’s 500 gaining ground for a sixth consecutive week. Some Wall Street economists even started to talk about the Fed setting a new 6% unemployment hurdle for any taper.
At this point the market wants to go higher—or to be more accurate money managers want the market to go higher. Yellen’s comments give it the confidence to do so and this week will be a test of how exactly how powerful that confidence might be.
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