US bonds rally on back of Janet Yellen's cautious optimism for US economy

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Federal Reserve Board Chairwoman Janet Yellen Testifies To House Financial Committee On State Of Economy
Yellen indicated a more gradual rate hike than investors were expecting (Source: Getty)

American stocks have rallied after Federal Reserve chair Janet Yellen indicated a cautious attitude to low inflation, but also said the US economy is now strong enough to withstand a rate rise.

She admitted that it was unclear when inflation would pick up in response to a stronger economic outlook for the States, saying her committee would "be monitoring inflation developments closely in the months ahead".

Read more: Oil prices fall despite bigger than expected drawdown in US stockpiles

After her remarks were made public, the dollar initially dropped to below the previous day's levels against the euro and fell against the yen. The currency was already on the backfoot following revelations regarding Donald Trump Jr's Russian emails scandal.

But investors saw a dovish tone in the statement, and were reassured by her comments that rates hikes would be gradual.

Read more: The Fed may not have investors’ backs for much longer

She added: "Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance."

The dollar later rebounded against the euro, trading near session highs against the common currency, as government bond yields in the euro area fell.

Meanwhile the Dow Jones added 126.14 points, rising 0.59 per cent.

However the pound rose for the first time in four days against the dollar on a combination of reactions to Yellen's speech and better than expected UK labour market data.

Read more: Euro dips against the dollar as Draghi defends easy monetary policy

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