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On the February 3, 2014 Janet Yellen was sworn in as the chair of the Federal Reserve Board of Governors. This is the first time a woman has ever held the position. In taking the position Janet Yellen has instantly become one of the most powerful woman in the world and, arguably, the most powerful in the financial markets.
That’s because announcements from the Federal Reserve have a huge impact on the US economy. And in the short-term the decisions she makes can dramatically shift the financial markets.
Why financial markets listen carefully to the US Federal Reserve
Analysts, traders and the financial press are constantly trying to predict what action the Federal Reserve board will take next. Meetings conducted by the Federal Reserve are held in private. But the actions that result from those meetings have huge ramifications for the whole of the US economy.
One of the most important functions of the Federal Reserve is to set the interest rates banks charge each other for overnight loans– known as the inter-bank lending rate.
The interest rate at which banks loan to each other overnight does not just affect banks it also has a direct influence on the cost of borrowing for businesses and individuals. By lowering or raising the interest rate the Federal Reserve can influence whether the economy will grow or contract.
If the Fed makes a decision that does not counter the expectations of analysts then the markets will usually not react. However, if the decision is contrary to the expectations of analysts then there is likely to be a reaction on the markets
Janet Yellen made a number of key points when she addressed the House Financial Services Committee on Tuesday, February 11.
She stated that she is ‘very concerned’ about rising inequality in the United States. She believes that this is one of the most important issues that is facing the United States at the present time.
She also noted that the influence of rising inequality on the recovery has not yet been determined.
She also expressed sympathy for those people on fixed incomes such as retirees during this period of low interest rates. But she stated that interest rates are low for a fundamental reason. That is that there is an excessive rate of saving relative to the demand for those savings for investment purposes.
She also said that the weak job reports for December and January were surprising to her. And, that policymakers should not act too quickly as the weather could have played a role in these figures.
The announcements from the new Fed. chair are already having an effect on the market. European stocks rose for a fifth day in a row as Janet Yellen pledged to continue reducing the stimulus due to a recovering economy. This was considered important because it demonstrated the Federal Reserve was going to continue with tapering but it would also not be a rapid exit.
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