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Stocks Rise After Fed's Yellen Says Economy's Not So Hot

Posted: March 31, 2014

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What may seem like bad news from the central bank chief — "the recovery still feels like a recession to many Americans" — was good news to investors trying to gauge the Fed's next move. Here's why.

Federal Reserve Chair Janet Yellen speaking Monday in Chicago.

Federal Reserve Chair Janet Yellen speaking Monday in Chicago. John Gress

Just under two weeks ago, Federal Reserve Chair Janet Yellen emerged from her first meeting as head of the central bank's policymaking committee to talk to reporters.

Stocks fell.

As David Wessel of the Brookings Institution told Morning Edition, Yellen seemed to fumble a key question. The central bank had issued a statement that some investors thought hinted it might start raising short-term interest rates earlier in 2015 than was anticipated.

In response to a question about interest rates, Yellen didn't quite clear things up. Since financial markets supposedly don't like uncertainty and surprises, stock prices dropped.

On Monday, in a speech to the National Interagency Community Reinvestment Conference in Chicago, Yellen apparently made things clearer in many investors' minds — ironically, by warning the economy still isn't doing too great.

For instance, she said that:

-- "The recovery still feels like a recession to many Americans, and it also looks that way in some economic statistics. At 6.7 percent, the national unemployment rate is still higher than it ever got during the 2001 recession."

-- "In some ways, the job market is tougher now than in any recession. The numbers of people who have been trying to find work for more than six months or more than a year are much higher today than they ever were since records began decades ago."

In the somewhat perverse world of Wall Street, a little bit of gloom-and-doom-type talk from the Fed chief was just what the markets seemed to want to hear. Stock prices were up about 1 percent as of midday. Why? Because a still-weak economy means the Fed likely will keep short-term interest rates low well into 2015 and will continue to only gradually reduce the amount of money it is pouring into the economy with its bond-buyback program.

In other words, the Fed still thinks the economy is weak ... which means it's going to continue helping the economy ... which means the economy should continue to expand ... which means that at some point, growth will be strong enough to let the Fed start raising interest rates and stop buying bonds ... which means ...

Uh, oh.

Right now, it seems that bad news is good news for the markets. But at some point, won't good news be bad news because it means the Fed's going to start trying to slow things down?

We'll leave that for another day.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

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