Dr. Yellen Terrifies Mr. Market

Three lessons from the markets' first encounter with the new chair of the Federal Reserve.
The stock market didn't much like what new Fed chief Janet Yellen had to say yesterday. Photographer: Andrew Harrer/Bloomberg

Stocks were down earlier today, because the market was unhappy with Janet Yellen .

They've since gone up, but their initial reaction still seems worth remarking on for a couple of reasons:

First, because a lot of people thought Yellen would be more accommodating than her predecessor, or the other front runner in the race to head the Federal Reserve. That was why they liked her: They thought she would care more about goosing employment than about what low interest rates were doing to savers.

Second, because I suspect that Yellen, like her predecessor, is learning how much power her tiniest remarks have. Any public pronouncement she makes will be subject to Talmudic analysis by the markets, which will then proceed to freak out over any indication that she might be planning to take away the punch bowl. Ben Bernanke found that out the hard way, and Yellen probably will too.

QuickTake The Fed's Taper

The third reason it's potentially interesting is that it may signal a policy change firming up within the Fed. But I'm cautious about reading too much into that. The labor market situation is almost unprecedented in living memory, and consequently, the Fed has been very much feeling its way through. Any forecast of Fed policy that goes out more than six to nine months will be very much subject to revision.

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