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Key Takeaways from the New Chairperson of the US Federal Reserve’s First Testimony before Congress

Last night, major American stock market indexes, the S&P 500, Dow Jones Industrial Average, and Nasdaq, all rose by at least 1% after Janet Yellen, the new chairwoman for the US Federal Reserve, came before US lawmakers for the first time as the Fed’s chair.

In Singapore, at the time of writing (10:00am, 12 Feb 2014), the Straits Times Index (SGX: ^STI) is up by 0.3% to 3,040 points with some of the blue chips like Golden Agri-Resources (SGX: E5H) and Jardine Strategic Holdings (SGX: J37) having even stronger gains of 1.9% and 1.3% respectively.

Elsewhere around the world, major market indexes like the FTSE100 from the UK, Nikkei 225 from Japan, and the Hang Seng Index from Hong Kong, have all took the US’s lead and displayed gains.

While Yellen’s words might be construed as causation for the global market’s positive moves today, it’s also good to point out that it might very well be just a correlation we’re seeing.

In any case, here’s what’s important about her testimony.

Yellen’s calming effect on the market

Like Ben Bernanke before her, Yellen offered a smooth and measured delivery before Congress, putting complex economic and fiscal matters into context for those who wonder how she’ll steer monetary policy. Early indications are that there won’t be many changes to policy under Yellen’s leadership, which isn’t surprising given that the Fed veteran had a big role in developing the policy set by Bernanke, who stepped down at as Fed chair at the end of last month.

There are a few takeaways from her testimony last night and they’re important to how the Fed will act over the next few years.

First, Yellen will continue to slowly pull back on the former US$85 billion per month bond-buying program (now US$65 billion) that was put in place to keep long-term rates low in the States. Tapering, as it’s known, was one of the fears of the market in 2013, but it hasn’t had a big impact on rates as of late. Yellen’s support for continued tapering gives some clarity for the long term.

Second, the 6.5% unemployment rate in the USA the Fed has targeted as its goal is now more of a soft goal than a point at which we should expect interest rates to rise. Yellen pointed out that underemployment is still very high and there are probably a fair number of people staying out of the labour market because they can’t find suitable work. In other words, there’s still lots of slack in the labour market in the USA, and until it tightens up the Fed will keep interest rates low.

Finally, we shouldn’t expect any changes to monetary policy based on emerging markets, unemployment, or economic growth until at least March. That’s when the Fed has its next policy meeting; by then there will be economic data that won’t be heavily affected by weather, like the last two months have been. This is a measured approach from Yellen, leaving knee-jerk reactions to the market, which is good for the woman at the center of global monetary policy.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Travis Hoium and first published on fool.com. It has been edited for fool.sg.