Fed Reserve gives boost to financial markets

Federal Reserve chairwoman Janet Yellen gives her first testimony before Congress. Photo by Reuters.
Federal Reserve chairwoman Janet Yellen gives her first testimony before Congress. Photo by Reuters.
New Federal Reserve chairwoman Janet Yellen provided a ''sugar rush'' to financial markets yesterday by making it clear there would be no abrupt changes to United States monetary policy, Craigs Investment Partners broker Greg Easton said.

Dr Yellen, who took over as head of the Fed from Ben Bernanke on February 1, said the central bank was on track to keep reducing its stimulus, even though the labour market recovery was far from complete.

Mr Easton said Dr Yellen was seen as market friendly and appeared likely to do her best to avoid the US slipping into a deflationary environment.

In her testimony to the US House of Representatives, Dr Yellen said the central bank must keep its eye on the ''unusually high'' incidence of long-term unemployment and the ''exceptionally high'' proportion of Americans who could find part-time work as it plotted a tricky reversal of its accommodative policy stance.

In recent weeks, the Fed had reduced its stimulatory bond-buying programme by $US20 billion ($NZ24 billion) a month to $US65 billion as the US economy showed signs of recovery.

Under Mr Bernanke, the Fed bought trillions of dollars in bonds to drive borrowing costs lower and stimulate investment and hiring. In December, it decided to begin scaling back its support given a drop in unemployment and strong economic growth.

Mr Easton said Asian markets responded well to Dr Yellen's comments, with all open markets trading up mid-afternoon New Zealand time.

''The markets were playing catch-up in some ways but were appreciative of comments the US is supportive of economic growth. That has filtered through to other markets.''

The Australian All Ordinaries continued its strong run but there was concern among emerging markets a stronger US dollar would affect their economic performance, he said.

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