The Dow peaked more than 225 points above its open, or around 1.4 percent, as members of the House Financial Services Committee peppered the new central bank head with questions about unemployment and interest rates. The Dow closed nearly 193 points ahead, and the S&P 500 Index likewise gained nearly 20 points, or 1.1 percent.
What has investors so excited? Here are three reasons markets gained ground throughout Tuesday.
Staying the Course
“I expect a great deal of continuity in the FOMC's approach to monetary policy,” said Yellen in her opening statement, and the rest of her testimony bore this out. The chair gave up little that markets had not already heard from the Federal Open Market Committee in its recent meetings. She reiterated that Fed tapering of its monthly asset purchases under its quantitative easing policy will continue in “further measured steps” similar to the $10 billion reductions seen at each of the last two FOMC meetings. She also said the Fed would likely keep interest rates at near-zero levels “well past” the time that the jobless rate dips below 6.5 percent.
“Markets hate uncertainty, and Janet Yellen’s testimony removed any uncertainty about the Fed removing stimulus too quickly,” says Greg McBride, senior financial analyst at Bankrate.com.
Markets seemed excited not because investors were pleasantly surprised but rather because they were assured few surprises, he adds.
“If she had indicated they were going to end QE sooner than the market expected, it would be several hundred points down, not up,” McBride says. “No news is good news, and she didn’t say anything new, and that in and of itself removes uncertainty.”
Calming Everyone Down after Bad Jobs Reports
“We have to be very careful not to jump to conclusions in interpreting what those reports mean,” she said in response to a question from Rep. Carolyn Maloney, D-N.Y. “There were weather factors. We’ve had unseasonably cold temperatures that may be affecting economic activity in the job market and elsewhere.”
That kind of reassurance puts the jobs numbers into a broader perspective and assures investors that the FOMC is also taking a broad view.
“What I heard in the early part of the Q&A is that she’s not concerned about the weak data, which I think the market took well,” says John Canally, vice president and economist at LPL Financial.
The question of jobs numbers also meant another opportunity to provide certainty, in this case that the Fed isn’t necessarily ready to change course based on these two reports alone.
“The committee will meet in March, [and] we will have a broad range of data on the economy to look at, including an additional employment report,” Yellen said. She also added it would take “a notable change in the outlook” to pause the Fed’s current taper path.
Outside FactorsYellen wasn’t the only game in Washington on Tuesday, Canally points out; the Republican-led House prepared for a Tuesday evening vote on a “clean” debt limit hike. If the measure is passed, it would suspend the debt ceiling -- and the uncertainty that has gone along with recent debt ceiling hikes in Washington -- until March 15, 2015, which Canally says also likely gave markets a boost.