Stocks had been mostly lower when the day's trading began, but indexes reversed course after Federal Reserve Chair Janet Yellen told a Senate committee that the central bank could raise interest rates as soon as next month.
Interestingly, Yellen made a clear rebuttal of the notion of tying monetary policy to a "rule" per se, noting the USA economy would be "much weaker" if central bank had followed Taylor Rule (which would call for rates of 3.5%-4%).
The Fed will also be paying close attention to the Republicans' efforts to dismantle the Affordable Care Act, said Yellen.
Yellen also spoke of considerable uncertainty over economic policy under the Trump administration: "Among the sources of uncertainty are possible changes in United States fiscal and other policies, the future path of productivity growth and developments overseas". "I can say emphatically", she said during a September news conference, "that partisan politics plays no role in our decisions about the appropriate stance of monetary policy". And she repeated her warning from January that waiting too long to raise rates "would be". "I think they're going to be business people and the days of an academic, economist Fed are going to be over".
"I would also hope that fiscal policy changes will be consistent with putting US fiscal accounts on a sustainable trajectory", Yellen told the Senate banking committee. With Governor Tarullo, a notable dove, departing the board, we might see Washington increasingly eager for a hand in the impending Fed merry-go-round and policies taking a cautious turn as a result.
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Yellen's semi-annual monetary policy report before the Senate Banking Committee is the first since Donald Trump became president. In Chicago Fed chief Charles Evans, typically a "dove" who prefers to keep rates to spur growth, said he officially predicted two rate hikes but could be comfortable with three moves.
Market reaction was swift, with government bond yields climbing on the news, signaling that traders thought a Fed hike was coming in the near term. "Even so, it is discouraging that jobless rates for those minorities remain significantly higher than the rate for the nation overall".
Yellen gave them little to work with other than an upbeat view of the economy.
Yellen added the Fed would like to shrink the balance sheet passively.
"People want to put money into that because they want to believe that growth will be stronger, that inflation will be more of an issue - a more normal economy, in other words", said Paul Christopher, head market strategist for Wells Fargo Investment Institute in St. Louis. The Fed chair said it was too early to say how Trump's plans to cut taxes and spur growth would affect the economy but warned that USA debt was already on an "unsustainable" trajectory.