On Tuesday, Federal Reserve Chair Janet Yellen took questions from the House Committee on Financial Services after a prepared testimony. It was her first public comments since she assumed the role as head of the U.S. central bank.
Promising continuity of her predecessor Ben Bernanke's policies, Yellen outlined her goal of continuing to taper so long as "incoming information" showed improvements in job markets and pushed inflation toward the Fed's goals.
Yellen took questions from all 60 members of the House panel. The testimony stretched long into Tuesday afternoon.
Here is a recap of the five most important takeaways from the afternoon session of Yellen's testimony.
- Yellen Delivered Calculated, Risk-Averse Answers: Janet Yellen was very calculated in the way she responded to questions. There was no new terminology, and the statements were very academic and focused on repeating many of the same terms and traditions laid out by the Fed in the last two years. The reason is simple: She didn't want to provide the markets with any reason to react negatively. The core theme of the conversation was "continuity" of her predecessor's policies. One of the reasons for today's rally is the reassurance that the Fed Chair provided to the markets.
- There Is No Time Limit on Bond-Purchasing Tapering or Interest Rate Hikes: Congressman Jeb Hensarling (R-TX) immediately raced to the Republican point today, asking when the Federal Reserve will consider a rate hike. The unemployment rate is at 6.6%, a tick above the target rate of 6.5% before the Fed said it would move on rates. Meanwhile, Rep. Randy Neugebauer (R-TX), asked when the bond-purchasing program would end, as he argued it fueled a dramatic increase in the nation's debt. Yellen explained that the Fed's bond buying is to improve economic growth, a mandate set by Congress. She also explained that it would hurt the economy and debt if the Fed purposely raised interest rates. As she noted, income economic data will be the driving force in the Fed's decisions moving forward.
ECONOMIC CHANGE AND MARKETS
Clearly, the biggest concern with the FED and others is maintaining economic growth. That's why continued FED bond buying and interest rates are so important and often discussed. The current situation is good for the stock market and was so last year, as well. The real question is, can we keep things as they are?
We should all know that is probably impossible in the intermediate to long term. Nothing stays the same, as the saying goes. So, if economic growth slips for a quarter or two, or earnings fail to continue upward consistent with an improving domestic/global economy, or inflation were to move higher, then the overall effects of these economic changes would be negative for the stock market, at current valuations. Will change eventually happen? Place your bets accordingly. I'll bet we will find out the answer some time in the next 12 months.