Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=225830
Story Retrieval Date: 10/21/2014 2:59:40 PM CST
Stock and bond markets rallied, with the major stock indices setting fresh record highs on Thursday, as Federal Reserve chairman nominee Janet Yellen reiterated the benefits of monetary stimulus at a Senate confirmation hearing.
Yellen did not specifically enumerate the short-term plans for the Federal Reserve’s $85 billion monthly asset purchases, known as quantitative easing, though she did voice her support for continuing monetary stimulus.
"I consider it imperative that we do what we can to promote a very strong recovery and we're doing that by continuing our asset-purchase program,” Yellen said at the hearing.
Speculation about the future of the Fed's bond-buying program after current Fed Chairman Ben Bernanke steps down in January has created uncertainty in the financial markets. With Yellen's apparent endorsement, bond prices rose, sending the yield on the benchmark U.S. 10-year Treasury note to 2.69 percent from 2.73 percent at Wednesday’s close.
The S&P 500 index gained 0.48 percent to 1,790.62 and the Dow Jones Industrial Average climbed 0.35 percent to 15,876.22, both surpassing the record-high closes set on Wednesday after Yellen’s prepared statement was released. The tech-heavy Nasdaq Composite index rose 0.18 percent to 3,972.74.
“It is very clear that the equity markets have been cheered by her statements that confirm that she supports ongoing quantitative easing until such time as there is convincing evidence that improving economic and employment conditions are sustainable,” said Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors, in an email exchange.
“That effectively removes the risk (or risk to some) that the Fed will begin to taper before she takes office in March 2014,” Johnson said.
Fed policy-makers have indicated they will continue the bond-buying program until unemployment hits their target rate of 6.5 percent and the inflation rate rises to their objective of 2 percent. The current year-over-year core consumer price index (excluding food and energy) is 1.7 percent. October's unemployment rate was 7.3 percent.
Members of the Senate Banking Committee said the Fed’s aggressive monetary stimulus may be causing asset bubbles and pointed to the stock market’s recent record-setting rally and soaring home prices in areas that were hard hit by the housing crisis of 2008, such as Las Vegas and Phoenix.
"I'd say we have to watch this very carefully, but I don't see that as an asset bubble,” Yellen said. “I see that as a very logical response of the market to generate a recovery in very hard-hit areas."
Johnson said he agreed that current stock prices do not reflect an overly frothy market.
“Yellen's comments that price-earnings ratios are quite reasonable and do not indicate an equity market bubble are quite accurate,” Johnson said. “The current level of interest rates has historically been accompanied by a significantly higher level of price-earnings ratios.”
The price-to-earnings ratio for the Standard & Poor’s 500 index stood at 17 Thursday, the highest it has been since the first quarter of 2012, when the ratio was 17.2.
Among the stock market's most heavily traded companies Thursday, Cisco Systems dropped 11 percent to $21.37, its biggest decline since 2011, after the company reported disappointing earnings Thursday.
Bank of America Corp. jumped 1.1 percent to $14.80 and Facebook Inc. rose 0.57 percent to $48.99.