News Worms
News Worms

US stocks shoot higher as markets mull Yellen testimony

US stocks shoot higher as markets mull Yellen testimony

USA stocks were higher in late morning trading on Wednesday, with the Dow hitting a record, after Federal Reserve Chair Janet Yellen said interest rates hikes would be gradual and will not have to rise much further to reach the neutral rate.

The buck initially pared its gains following Yellen's comments, which were in testimony prepared for delivery before the House Financial Services Committee, but it subsequently rebounded, seeing particular strength against the euro.

Back in London, attention shifts to the United Kingdom later this morning when it releases the latest United Kingdom jobs report.

Stock futures in the US for Monday were up, suggesting shares on Wall Street will open higher and extend gains that were made following the release last Friday of the jobs report by the Labor Department. Brent crude, used to price global oils, lost 48 cents to $46.40 a barrel.

Regarding bond sales, the report said that the Fed "currently expects that, provided the economy evolves as broadly as anticipated, it would likely begin to implement the (bond sales) program this year". Despite the stronger than expected job growth, the unemployment rate inched up to 4.4% from 4.3% in May.

The Fed chair is likely to repeat a message she has been sending about rates: That further gradual increases will follow the three rate hikes the Fed has made since December. Growth in the first quarter was slow at about 1-1/2 percent on an annualized basis, and inflation took a step backward.

"I expect, and certainly hope, that this will go smoothly and it will be a gradual and orderly process", Yellen said.

Yellen noted that while the USA labor market has continued to strengthen and while the US economy appears to be growing at a moderate pace, the inflation has continued to run lower than the Fed's 2% long-term objective. That in turn could have forced the Fed to raise rates more aggressively and put the recovery at risk.

By her testimony yesterday, the economy is now on an even keel, near or beyond full employment.

But she also noted that given current estimates, the federal funds rate "would not have to rise all that much further" to reach a neutral level that neither encourages nor discourages economic activity.

A shrinking of its balance sheet, like raising interest rates, is aimed at normalizing monetary policy and removing the extraordinary Fed support to the economy over the last decade. Banks are flush with cash after clearing the Federal Reserve stress tests, raising the prospect that financial giants could turn to acquisitions as a way to grow. That puts the real rate close to zero, where Yellen and her dovish allies on the Federal Open Market Committee believe it needs to be.

Yellen's remarks this week come as the Fed is picking up the pace of its interest rate hikes, which will eventually impact millions of Americans - from savers to home buyers to investors.


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