After Yellen Released Interest Rate Policy Expectations… Dow Recovered its Earlier Losses

After  US Treasury Secretary  Yellen released  interest rate policy expectations, investors have a strong risk aversion, and the three major U.S. stock indexes fell sharply. The Nasdaq fell more than 400 points during the session, a drop of nearly 3%. At the close, it fell sharply by 261.62 points, or 1.88%. When inflation expectations and demand for hedging rose, the US dollar index and gold prices were supported.

However,  Janet Yellen’s latest speech after the close said that she respected the independence of the Fed and said that the rise in inflation in the next six months or so will be “temporary”. If there is an inflation problem, she is sure that she can rely on the Fed to solve it.

US Treasury Secretary Yellen said on Tuesday that with the gradual implementation of the US economic stimulus plan, interest rates may need to be raised at some point in the future to prevent any overheating of the economy, but she did not disclose a specific timetable.

Yellen emphasized that the Biden administration’s economic investment is necessary to improve the competitiveness and productivity of the U.S. economy. Although the increased fiscal expenditure is smaller than the total economic output, it may still cause interest rates to rise very modestly.

Since March last year, the U.S. Congress has introduced approximately US$5.3 trillion in stimulus measures. These stimulus measures have pushed the US fiscal deficit to US$1.7 trillion in the first half of fiscal 2021 (October 2020 to March 2021). The U.S. fiscal deficit will exceed 3 trillion U.S. dollars in fiscal year 2020.

Yellen’s speech was beyond market expectations. Generally speaking, White House officials do not comment on interest rate policy. After the US stock market closed, Yellen said when talking about interest rates that she respected the independence of the Federal Reserve and did not make predictions or recommendations on the level of interest rates. Yellen also said that the rise in inflation in the next six months or so will be “temporary.” If there is an inflation problem, she is sure that she can rely on the Fed to solve it.

Regarding Yellen’s remarks, White House Press Secretary Jen Psaki said on Tuesday that Yellen undoubtedly understands the independence of the Fed. Biden and Yellen share the same views and believe that “inflation risks must be treated very carefully.”

At the interest rate policy meeting that ended last week, Fed officials unanimously agreed to maintain the current monetary policy unchanged until the economy further recovers from the impact of the epidemic. Fed Chairman Powell previously stated that the Fed hopes that the inflation rate will be moderately higher than 2% for a period of time, and most Fed officials believe that interest rates will not be raised before 2024.

On the same day, Fed officials also gave a speech on the policy outlook. San Francisco Federal Reserve Bank President Daly said that the US economy is still a long way from the Fed’s goal of achieving full employment and 2% inflation, and it is not time to start talking about reducing support for recovery.

After Yellen’s comments on interest rate policy, investors have a strong risk aversion, and the three major U.S. stock indexes fell sharply. The Nasdaq fell more than 400 points during the session, a drop of nearly 3%. At the close, it fell sharply by 261.62 points, or 1.88%. The S&P 500 index closed down 0.67%, while the Dow recovered its earlier losses and closed up slightly by 0.06%.