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Yellen Assures Markets of Low Rates

In her first public remarks outside of Washington since taking the reigns of the Fed in February, Federal Reserve Chairwoman assured the market that the Fed will keep interest rates low until the economy has more fully recovered. With unemployment rates approaching target levels, markets began to fear that the Fed may begin to taper their easy money policies. But the chairwoman’s announcement quelled these fears, promising to continue to hold down interest rates until the job market has returned to normal. In support of the Fed’s decision, Yellen cited elevated levels of part-time workers, low job market turnover, below average wage growth, long term unemployment, and a low participation rate that artificially deflates unemployment rates.

What makes this policy announcement even more interesting is the unusually personal tone with which it was delivered. In place of the typical economic jargon of Fed chairman, Yellen phrased her explanation in a more common sense approach, citing three particular individual stories of hardship in the stagnant economic climate.

This commitment is significant in that it lowers expected future yields for short to medium term assets, lowering interest rates, helping to spur investments, and incentivizing banks and financial institutions to purchase assets other than government bonds. Moreover, Chairwoman Yellen’s personal tone may also prove a particularly effective policy. Many empirical studies have noted the largest transmission channel through which easy money policies effect interest rates is the management of expectations. Yellens personal, almost populist approach may more effectively broadcast the feds commitment to a broader audience and therefore may have a larger impact in the market.

Despite the Chairwomans tone, many Fed officials disagree with Yellens dove policies, indicating that they expect interest rates to begin to rise in mid to late 2015. After a recent reduction in the bond buying program to $55 billion per month, many predict the Fed will continue to gradually draw down purchases unless a significant change in market outlook occurs.

Source: Pedro Nicolaci Da Costa, “Yellen Assures Markets on Rates” The Wall Street Journal, 4/1/2014