All of the markets were up today on a solid Yahoo earnings report and factory output data but I believe that there was a bigger signal that caused the market to rise almost 1%. Yellen announced today that the Fed weighs three big questions when they analyze the economy to determine if the economy is healthy enough to raise interest rates. The Fed focuses on low inflation, labor-market slack and an unknown third. Yellen stated today in a speech to the Economic Club of New York that the Fed believes a too-low inflation rate is a bigger worry than easy money causing a hike in consumer prices. The Fed is also still worried about the labor market even with the positive report that came out last week. The Fed’s remarks continue to illustrate their concern about the economy and the labor market even though there have been positive signs of growth. Full employment is now thought to be somewhere between 5.2% and 5.6% and the Fed doesn’t expect to meet its goal of full employment and price stability till 2016 at the earliest. Many analysts believe that the interest rate will begin to increase sometime around the middle of 2015. Many of the Fed’s policy opponents consistently worry about high inflation. The Fed though, believes that it is more likely that inflation stays below 2%, which would make it really difficult for businesses and households to pay off their debts.
At the end of the day, I believe that the Fed has a dramatic influence over the stock markets. The markets had a scare last week with the positive jobs report and this led to a large sell off in the technology sector because investors were afraid of losing the easy money from the Fed. The Fed’s announcement today gives investors a sign that the low interest rates are going to continue for a while. While many people might view the Fed’s reports that the economy isn’t as healthy as we would like as a bad announcements, the markets actually viewed this as a positive report. I believe that the market no longer takes into account “negative” outlooks from the Fed because the sentiment is that the this means the Fed will continue with its buy back programs. The negative outlook of Yellen’s announcements helped lead to a rise in the stock market while last month’s Fed announcement that it no longer considered an unemployment rating of 6.5% as grounds to maintain low interest rate caused the market to drop. It’ll be interesting to see if the trend in Fed’s announcements and the stock market continue to be inversely correlated.