US markets closed higher on Yellen's dovish comments

13 Jul 2017 Evaluate

The US markets closed higher on Wednesday, with the Dow industrials setting its first closing record in nearly a month, as Federal Reserve Chairwoman Janet Yellen emphasized the central bank’s gradual approach to normalizing monetary policy and expressed optimism about the economy in congressional testimony. According to the central bank’s latest deep dive on the economy, a shortage of qualified workers in the US has limited hiring, but there’s little evidence firms are raising wages to attract jobseekers. The so-called Beige Book, the Fed’s regular survey of business conditions around the country, said economic growth was slight to moderate from late May through June. That’s a bit less upbeat compared to the May report. The ultra-tight labor market, with unemployment near a 16-year low at 4.4%, was frequently cited by those surveyed as a headwind. With wages rising only modestly, some senior Fed officials believe inflation is likely to remain on the low side for a longer period than the central bank now predicts. They want to take an even more cautious approach on raising interest rates until more evidence of higher inflation emerges. The annual rate of inflation under the Fed’s preferred price gauge slowed to 1.4% in May from a five-year high of 2.1% earlier in the year.

Meanwhile, Fed Chair Janet Yellen said that the US economy is healthy enough for the Fed to raise rates and begin winding down its massive bond portfolio, though low inflation and a low neutral rate may leave the central bank with diminished leeway. She said that reductions in the Fed’s portfolio of more than $4 trillion in securities are likely to begin this year. But she also noted that given current estimates, the federal funds rate would not have to rise all that much further to reach a neutral level that neither encourages nor discourages economic activity. The Fed still feels the economy needs loose, or accommodative, monetary policy, so a lower neutral rate means the Fed may feel compelled to slow the pace of rate hikes down the road.

On the economy front, Mortgage Bankers Association data released showed that US mortgage application activity recorded its steepest drop since December as interest rates on 30-year fixed-rate home loans climbed to their highest level in nearly two months. The Washington-based group said its seasonally adjusted index for mortgage applications fell to 391.9 in the week ended July 7, down 7.4 percent from the prior week which marked its biggest decline since a 12.1 percent fall in the December 23 week.

The Dow Jones Industrial Average added 123.07 points or 0.57 percent to 21,532.14, the Nasdaq added 67.86 points or 1.10 percent to 6,261.17, while S&P 500 edged higher by 17.72 points or 0.73 percent to 2,443.25.

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