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14th May 2022

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How Janet Yellen Threw the Stock Market for a Loop

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Treasury Secretary Janet Yellen.

White House/Bloomberg

Janet Yellen, the Treasury secretary, has learned something that Janet Yellen, the former Federal Reserve chair, presumably already knew: Don’t talk about interest rates, especially if you’re at all concerned about the stock market’s reaction.

At a conference hosted by the Atlantic on Tuesday morning, Yellen suggested rates might have to rise, as the Biden administration’s planned spending could cause the U.S. economy to overheat. But at a Wall Street Journal conference held after the market’s official 4 p.m. EDT close, she attempted to walk back those earlier remarks, carefully avoiding any predictions about interest rates and emphasizing her respect for the central bank’s independence.

Earlier in the day, she observed “some very modest increases in interest rates” might be necessary to prevent overheating in the economy. That might be needed as a result of the $4 trillion-plus in spending plans put forth by the White House, even though she characterized them as “relatively small relative to the size of the economy.”

Yellen’s initial midmorning comments accelerated the decline in stocks already under way, especially on the technology-dominated

Nasdaq Composite,

which ended 1.88% lower Tuesday. That capped a 3.19% drop over the past three sessions, reflecting the index’s recent weakness despite blowout earnings reports from some of the megacap tech names.

But the broader

S&P 500

slipped 0.67% and ended just 1.11% off its record touched the previous Thursday, while the

Dow Jones Industrial Average

managed a slight gain of 0.06%, helped by healthcare and industrial names.

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Tech stocks trading at high price/earnings multiples remain vulnerable to higher interest rates, says Quincy Krosby, chief market strategist at Prudential Financial. Yellen also said the economy could be approaching full employment by next year. “So, the logical inference was that rates will rise. You can see how sensitive the market was to that, especially the algos that don’t miss a syllable,” she added, a reference to computer algorithms programmed to buy or sell on news reports without human traders.

Yellen’s initial comments seemed more like the musings of some Fed presidents, who may not even have a vote on monetary policy, rather than the comments of the chief economic policy official in the executive branch. In the prior administration, the White House complained vociferously about Fed interest rate hikes, a break from the longstanding respect for the central bank.

Despite the breach of the Chinese Wall between Treasury and the Fed, Tom Porcelli, RBC Capital Markets’ chief U.S. economist, praised Yellen’s “sage words.” In a client note, he asked if her observation is really surprising given the economy’s growing strength.

Indeed, Prudential’s Krosby adds the markets may have been especially sensitive to the Treasury secretary’s comments given “whisper numbers” for the April employment report due Friday of a rise of 1 million or more in nonfarm payrolls. That would follow March’s robust 916,000 increase.

Fed Chairman Jerome Powell has been steadfast in insisting monetary policy won’t be tightened until substantial progress is made in closing the shortfall of over 8 million jobs that remain as a result of the Covid-19 pandemic. The sharp rise in inflation also is deemed by the Fed to be transitory, the result of supply bottlenecks and so-called base effects, a view that Yellen reiterated in her afternoon comments.

Powell is sticking steadfastly to the Fed’s timetable of not raising its federal-funds target from the current 0%-0.25% range until late 2022 and is “not thinking about thinking about” curtailing its $120 billion in monthly securities purchases, Krosby notes. Yet many observers think the Fed will have to begin discussing a taper of its bond buying later this year. Slowing this flow of liquidity would likely roil richly valued equity markets.

Write to Randall W. Forsyth at

2021-05-04 23:32:00

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By admin