The outlook for another interest rate hike remained unclear following the speech by Federal Reserve Chairwoman Janet Yellen to the Economic Club in New York Tuesday, her first press conference after the Fed held rates steady two weeks ago.
The U.S. dollar dropped sharply and stocks on Wall Street moved higher after Yellen’s comments seem to contradict more recent hawkish comments from several of her Fed colleagues. The Fed chair painted a cautious picture of the U.S. economy while acknowledging that the overall mixed U.S. picture for 2016 contained encouraging signs so far, including the continued strengthening of the labor market. She also pointed to external risks, including slowing global economic conditions, the level of the dollar and market reactions to China’s currency policy.
Yellen reasoned that the Fed had adequate channels to support growth by maximizing employment and stabilizing inflation but cautioned about the extent to which the central bank can continue to be effective. She held back from discussing negative interest rates, a hot topic driven by the decision of her counterparts in Europe and Japan to push theirs below zero.
Markets Pleased
The markets liked Yellen’s cautious assessment of the economy and interpreted her message as an indication of continued support from the Fed. In reaction, stocks and corporate bond prices rose and government bond yields fell as traders revised down their expectations of the path of future policy interest rates. The dollar fell sharply against a basket of currencies and dollar-priced commodities pared losses.
In afternoon trading on Wall Street, tech shares led gains in major indexes while energy shares which had been the largest weight on the S&P 500 were down 0.8%.