Yellen’s speech eases investor concerns about an interest rate rise

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Apr. 8 2014, Published 8:00 a.m. ET

Investors relieved

Monday, March 31 saw an important development relating to the jury selection of the Apple–Samsung patent law suit. It was also the day that the current Federal Reserve Chair Janet Yellen spoke at a community reinvestment conference in Chicago.

The markets had been eagerly waiting for Yellen to explain her recent comment that interest rates could start to rise six months after the Fed ends its bond-purchasing program next fall. While addressing her audience on what the Fed is doing to promote a stronger job market, Yellen indicated that the Fed still thinks rates should remain low to stimulate borrowing, spending, and economic growth, easing investor concerns over an earlier-than-expected rise in interest rates.

The Fed Chair Janet Yellen stated that the economy still needs extraordinary support for quite some time. This essentially means exceptionally low policy rates as she also said that recovery aid “need not grow as quickly.”

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ETFs like the ProShares Short 20+ Year Treasury (TBF), the HOLDRS Merrill Lynch Pharmaceutical (PPH), and the Vanguard Information Tech ETF (VGT) which has its major holdings in information technology companies like Apple Inc. (AAPL) and Google, Inc. (GOOG), could do well during the early part of a tightening cycle, when the Fed starts raising the Fed funds rate.

In her speech, Yellen explained how the Fed uses the monetary policy to create jobs. The Fed chief stated that the economy is still short of the Fed’s jobs and inflation goals. She noted that inflation is well below the goal of 2%and that the unemployment rate at 6.7% is well above the ideal 5.2%-5.6%. She stated that the labor market is worse than indicated by the latest unemployment rate number of 6.7%. Here she discussed the presence of slack in the labor market, and its importance for the Fed’s monetary policy tools to be effective.

She went on to express her views on the state of U.S. economic recovery post the Great Recession caused by the housing bubble of 2009, highlighting measures that the Fed has already taken, and what the Fed still needs to do to achieve its two goals of maximum employment and price stability, assigned by the Congress. Yellen said the Fed has a strong commitment to maintaining extraordinary support.

Read more on the Janet Yellen speech in Key takeaways from Janet Yellen’s job speech in Chicago. To know how the manufacturing sector in Texas has performed, read the next part of this series.

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