Is Janet Yellen set to shake things up in the Fed? Let’s break down her latest testimony in Congress to look for some clues. Here are the five main takeaways from her speech this week:
1. Taper is still a go.
New leadership, same outlook. Fed Chairperson Janet Yellen confirmed that the U.S. Federal Reserve will push through with the taper plans outlined during one of former Fed head Bernanke’s last monetary policy statements. With that, the Fed will carry on with its plans to cut asset purchases by 10 billion USD per month, despite the recent setbacks in the U.S. economy.
2. Yellen isn’t worried about the latest NFP reports.
Unless you’ve been living under a rock or floating off into outer space like Robopip, you’d know that the past couple of jobs releases have been very disappointing. The U.S. economy added a meager 75K in hiring for December 2013 then followed it up with a dismal 113K rise in employment for January this year. Aside from that, the participation rate has tumbled to its 35-year low, signaling that more Americans have given up looking for work.
Yellen noted that these bleak readings may have been a result of seasonal factors, particularly the extremely cold weather conditions. “We’ve had unseasonably cold temperatures that may be affecting economic activity in the job market and elsewhere,” she said.
3. Keep tabs on other labor market indicators.
With or without weather-related effects though, there’s no denying that there’s a considerable slack in the U.S. labor market. In particular, Yellen pointed out concerns about long-term unemployment.
Taking a look at the bigger picture in the jobs market shows that a total of 3.6 million Americans have been unemployed for more than 6 months while 7 million are stuck in part-time jobs due to unfavorable business conditions or difficulties in finding full-time work. For now, Yellen plans to take a closer look at the “unusually high” incidence of long-term unemployment to ensure that the Fed’s monetary policy plans don’t make labor conditions any worse.
4. Global market volatility isn’t a concern… for now.
Concerns of a meltdown in the emerging markets and the resulting pick-up in global market volatility have also caught the eye of Yellen, but she brushed these aside and said that these don’t pose a substantial threat to the U.S. economy.
She acknowledged that the Fed’s monetary policy decisions can affect the economic performance of other nations but also emphasized that the Fed will continue to pursue the goals assigned by Congress, which is to support employment and economic growth by maintaining price stability. In other words… Not my economy? Not my problem.
5. Risk appetite to return?
Based on Yellen’s testimony, it’s clear that the Fed is intent to ensure that the U.S. stays on track with its economic recovery. This was enough to breathe life back into U.S. equities, sparking more than 1% gains for the S&P 500 and Nasdaq. The Dow landed back above the 16,000 mark after chalking up consecutive losses in the first few weeks of February.
However, it’s not clear whether this rebound in risk will spill over to global equities or if it’s confined to the U.S. stock market. After all, other stock markets suffered sharp declines when the Fed announced its taper plans back in December. Yellen’s pledge to keep reducing bond purchases and her plans to focus mostly on the U.S. economic recovery confirms that lower liquidity is to be expected in the coming months, which doesn’t bode well for emerging markets.
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