Fed Comments Lift Market Spirits

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Driving today’s gains are comments from Fed Chairwoman Janet Yellen that indicate the lift-off option is very much on the table later this year.

Many thought that market participants would push stocks higher if the Fed stayed back from announcing a rate hike at last week’s FOMC meeting. But as we know, stocks lost ground following the decision. The reason for that is that the non-decision added to market uncertainty about the US economic outlook. Uncertainty in the market prior last week’s FOMC meeting was mostly about China and questions about whether the Fed would raise rates. There wasn’t much concern about the outlook for the US economy.

But the Fed’s inaction raised doubts about the US outlook as well. After all, if the US economy still needed crisis-era interest rates after seven years of growth, then it must be fairly fragile in the face of the emerging global challenges.

Yellen’s Thursday speech at the University of Massachusetts - Amherst echoes Monday comments by another Fed official that suggested that the non-liftoff decision was a close call and could have gone either way. In fact, the Chairwoman appeared to put herself squarely in the camp within the FOMC that sees the US economy ready for lift-off later this year, which many believe will most likely be the December (and not next month’s) meeting. This morning’s positive revision to the Q2 GDP growth pace clearly shows that the US economic picture is stable enough to withstand a modest rate hike.

Markets today are loving this hawkish-sounding Yellen, not because they want rates to rise, but because they now see a rate hike as a sign of the Fed’s confidence in the economic outlook. It will help if the September non-farm payroll report coming out a week from today will show continued gains in the labor market.

Related podcast interview:
Brian Pretti on the Federal Reserve’s Decision to Stand Pat

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