Traditionally when the Chairman of the Federal Reserve speaks markets listen. Today the issue is Interest Rates and if and when the Fed will raise them again. The concern about this subject is sufficiently strong that Yellen speaks and stocks waver.The Wall Street Journal reports that stocks edge lower in the run up to the next speech by the Chairman of the Fed, Janet Yellen and then inch up after she speaks.
Before
U.S. stocks slipped Tuesday as investors awaited a speech from Federal Reserve Chairwoman Janet Yellen that could offer hints on the timing of U.S. interest rate increases.
The Fed surprised markets with an unexpectedly dovish stance on rates in its March statement and news conference. But recent comments from Fed officials have since heightened market expectations for an interest rate rise in June.
After
U.S. stocks turned higher Tuesday after Federal Reserve Chairwoman Janet Yellen said global economic and financial uncertainty has heightened the risk to the U.S. economy and justifies a slower path of interest-rate increases.
When Yellen speaks and stocks waver just what are traders concerned about?
The U.S. Economy and Interest Rates
The Fed does not want to bring on another recession so they are not going to raise rates too quickly. However, if inflation takes hold it often takes a couple of years of higher interest rates to contain it. So, the Fed is moving cautiously to stay in the sweet spot between going too fast and too slow in raising rates. The first places they are looking is at the economy and employment. Despite the protestations from Mr. Trump that the U.S. economy is in terrible shape and Mr. Sanders that most people are working longer hours for lower wages the unemployment rate is at a historic low. The Washington Post looks at the U.S. economy.
Not only has the headline unemployment rate dipped to 4.9 percent, a figure generally considered consistent with full employment, but also the puzzling downward trend in labor-force participation – the share of the working age population either in a job or seeking one – appears to have reversed as well.
Increased labor force participation, in turn, reflects an improving wage picture. Though overall wages are growing at just above 2.2 percent – higher than the rate of inflation – wages for individuals employed at least 12 months are now growing at a median annual rate of 3.2 percent, according to the Federal Reserve Bank of Atlanta.
The numbers show that the economy is on the mend and that wage inflation is taking hold. Thus the Fed will probably raise rates soon and do it again shortly thereafter. Is this why stocks fall when Yellen speaks?
The Cost of Doing Business
After the December Fed rate hike Fortune published an article reviewing what the Fed’s rate hike means for small businesses.
There are three key measures of the health of America’s small businesses that the Fed should consider as it works to steer the economy forward:
- Interest Rates on Small Business Loans
- Small Business Employment
- Rate of Startup Activity
This thoughtful article helps us understand the effect of interest rates on businesses and by extension stocks. This is why Yellen speaks and stocks waver.
