U.S. equities and stock exchange traded funds turned positive in mid-Tuesday after Federal Reserve Chairwoman Janet Yellen pointed to strengthening economic cues that could support short-term interest rate hikes.
The S&P 500 Index, along with related funds including the SPDR S&P 500 ETF (NYSEArca: SPY), iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard 500 Index (NYSEArca: VOO), were 0.3% higher Tuesday.
The markets were led by the financial sector, with the widely observed Financial Select Sector SPDR (NYSEArca: XLF) up 1.1%.
Yellen argued that delaying rate hikes could force the Fed to raise benchmark interest rates in quick spurts, which could risk impeding the economy, reports Yashaswini Swamynathan for Reuters.
“Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” Yellen said.
However, Yellen warned of uncertainty under President Donald Trump, especially concerns over his administration’s economic policies. Trump’s expansionary economic promises have helped fuel a record-setting rally in U.S. equities, but the new president has shown a dearth in clarity his pledged policies.
“It is too early to know what policy changes will be put in place or how their economic effects will unfold,” Yellen said.
Yellen did not provide any definitive outlines on three rate hikes this year, nor did she reveal whether a rate hike might come in March or in June as most expected.
“This doesn’t mean they will move in March, but the Fed wants to have the option to move,” Omer Esiner, chief market strategist at Commonwealth Foreign Exchange, told Reuters. “The market seems to be under-pricing a upcoming rate hike.”
Even with higher rates, investors are looking to the improving economy and strengthening U.S. companies’ fundamentals to support further stock price appreciation.
“We’ll have higher rates, but if earnings can continue to move ahead, then the market will continue to grind higher,” Karyn Cavanaugh, senior market strategist at Voya Investment Management, told the Wall Street Journal.
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