Fed Chair Janet Yellen's Comments Yesterday Should Leave You Smiling

The Dow barely blinked as Federal Reserve Chairwoman Janet Yellen testified on Capitol Hill yesterday.

May 8, 2014 at 1:00PM
Take The Long View

The Dow Jones Industrial Average (DJINDICES:^DJI) was up 87 points in early afternoon trading. This comes one day after the Dow hardly batted an eye at statements made to a congressional committee by Federal Reserve Chairwoman Janet Yellen (who was back on Capitol Hill today).

Why? Because her message was right on the money. The economy still has risks. It still has weak spots. It's still recovering. But overall, there is genuine reason for optimism.

Here are three quotes that sum it up.

1. "Considerable slack" in the labor market
Yellen said the labor market continues to experience "considerable slack," despite last month's impressive 288,000 new jobs and 6.3% unemployment rate.

Where The Money Is

What this means practically is that the Fed will continue its easy money policy to support this half of its dual mandate.

How much "considerable slack" are we talking about here? According to Bruce Greenwald on yesterday's episode of The Motley Fool's "Where the Money Is" podcast, adjusting out long-term unemployed individuals who have given up on the job search, the unemployment rate would still be somewhere in the neighborhood of 14%-15%. Ouch.

2. Housing data has "remained disappointing"
The past few weeks have not been pretty for the 5-year-old housing recovery. New home sales were particularly painful last month, but the trend in both new and existing home sales has been disappointing.

After the notably cold winter this year, many hoped for a strong bounce once the spring selling season hit full stride. At this point, it doesn't seem like that bounce is here ... yet.

The chart below demonstrates the trend well. The sharp turn lower beginning in late 2013 is what has everyone so worried.

US Existing Home Sales Chart

US Existing Home Sales data by YCharts.

3. Regarding the first quarter's disappointing GDP growth

Yellen said:

Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter.

Instead of focusing on the myriad risks that could prove Yellen's optimism wrong, let's instead let her words speak for themselves. The economy looks to be "on track for solid growth in the current quarter." 

For the hard-core economics geeks among us, you can watch Yellen's full testimony in this video, courtesy of CPAN.

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Jay Jenkins has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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