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Yellen Speaks, Yields Rise, the Sky is Falling?

tnx

Yesterday Federal Reserve Chair Janet Yellen answered a reporter’s question about when would the Fed start to raise rates. She said it would be a considerable time after the end of the current tapering, maybe six months.

That clarity of time frame scared both the stock and bond markets, and it sent bond yields higher – you can see the exact moment she uttered the words “six months” on the graph above.

But what does that actually mean in terms of a time frame? At the current pace of tapering, the Fed will end their bond buying a bit under a year from now. If you add six months to that, you get a rough time frame of September 2015 for the first increase in the Fed Funds rate.

Historically, the initial shock of increased short-term rates sends stocks down but it is generally overcome by increased economic activity, higher employment, and increased corporate earnings. However, as the series of increases push rates higher, economic activity slows, unemployment increases and corporate earnings decrease, sending the stock market down.

There is a lot of time between now and September 2015 – and I truly believe that if the economy continues to stumble along at a 1.5% GDP growth rate and continued high unemployment, the likelihood that they will raise rates is slim. But we will see.

The sell-off in the stock and bond market yesterday was premature if it was based upon the fear of rising short-term interest rates – the sky isn’t falling but we do have more clarity into what the Federal Reserve is thinking, and clarity is always a positive for equity investors.

Mark