Yellen talked about a solid and improving economy but also about disappointing labor force participation and anemic wage growth. She said it would be several months before the Fed would boost rates. Stocks soared on the news with both the S&P 500 and Dow closing at record highs. The Nasdaq also saw healthy gains and is now less than 1% away from the 5,000 milestone.
But The Wall Street Journal's Pedro da Costa called Yellen’s testimony "hawkish" because, he says, Yellen “seemed fairly willing to leave the idea of a June interest rate hike on the table which many in the market had not been expecting.”
“In a sense, the market’s reaction is surprising,” da Costa told Yahoo Finance in the accompanying video. “Market reactions are often erratic. They can turn around quickly,” he said.
While the Fed clearly wants to see more improvement in the economy and signs of higher inflation, Yellen did give a sort of road map to an initial rate hike and any hike that follows. That means a move away from forward guidance. The Fed will now look at data each meeting and decide from there what to do with interest rates. The Federal Reserve has not raised rates since 2006.
“It’s more normal in a sense,” says da Costa. “The last time the Fed raised interest rates, they used an expression that said they would continue to raise rates at a measured pace and that was taken to mean a quarter point per meeting," he says, "And the Fed wants to be less predictable this time around.”
Yellen's testimony Tuesday was the Fed's biannual update for the Senate Banking Committee on monetary policy. There were a few fireworks. When asked about Senator Rand Paul’s Audit the Fed bill, Yellen repeatedly squashed the idea that the Fed needs to be audited. She made the point that the Fed is already audited financially and called the legislation a ploy to politicize monetary policy.
The toughest back-and-forth came from Massachusetts Democratic Senator Elizabeth Warren. Warren wanted 'yes' or 'no' answers from Yellen about Fed General Counsel Scott Alavarez who in recent comments took a portion of the Dodd-Frank financial reform to task at a public meeting. Warren wanted to know if this reflected the views of the Fed.
“Yellen was a little be evasive on that one,” said da Costa.
The markets and Fed watchers will listen closely to what Yellen says Wednesday morning as well. But da Costa says her message Tuesday was pretty clear: “This is a chairwoman that is getting ready to raise interest rates and that is getting ready potentially to start as soon...as March changing some of the language to signal to the markets that rate hikes could be coming as early as June.”
