First came the "Greenspan put." Then the "Bernanke bounce." Now stock prices on
The Federal Reserve, with its ability to adjust the levers of monetary policy, has long had a sizable impact on the U.S. stock market.
Indeed, central bank support of financial markets, especially in periods of stress, during the
The so-called Yellen Effect was on full display Tuesday. The Dow Jones industrial average soared 193 points to 15,995 after Yellen reassured markets that the Fed remains committed to making sure the economy and job market keep healing in her first-ever testimony before
Yellen's words soothed the nerves of anxious investors. She said all the things they wanted to hear.
Yellen said she strongly supports the market-friendly policies of recently departed Fed chief Ben Bernanke. She said the wind down of quantitative easing, or QE, would be done in "measured steps." She said the Fed will keep short-term interest rates around 0% for a long time after the unemployment rate, now 6.6%, dips below 6.5%.
More important, Yellen said the Fed would consider easing back on QE "tapering" if the economy hits the skids again.
Here are five reasons Yellen's words soothed
1Yellen is mirror image of Bernanke. While vice chair under Bernanke, Yellen's views on Fed policy were in sync with her then-boss, and she helped shape and also backed the Fed's steps to boost the economy and create more jobs. Her written testimony and responses to congressional leaders Tuesday confirmed that the Fed under Yellen will be very similar to the central bank under Bernanke.
"Everyone was waiting for Yellen to say her peace, and she said what everyone hoped for, which is she is not doing anything different than Ben," says
2She didn't rule out tapering the taper. While Yellen reiterated that for now the Fed plans to stick to its timetable to wind down QE later this year via "measured steps," she stressed that there was no "preset course" and that incoming economic data would determine the ultimate timing of its exit strategy.
"She said they will monitor the data, and if it weakens they will reconsider tapering," adds Roberts. "That was a key message."
3She said 0% rates aren't rising anytime soon. Guiding the market, Yellen reiterated that the Fed would not even begin to discuss raising short-term rates, currently around 0%, until long after the unemployment rate dips below the 6.5% threshold.
"What she is saying is they will keep short-term rates really low for a long time," says
4Her message: I'm the boss. By backing current Fed policy, she solidified her reputation as a dove, or a policymaker who prefers easy policy for longer to get the job market humming again. She also demonstrated leadership.
"She established that she is the boss, that she is in charge and that she is a dove," says Seiver.
5She gave the
economy a vote of confidence. "She downplayed the emerging-market problems and said she would continue reducing bond purchases, which means the economy is getting stronger," says
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