US Shares Slip as Yellen Vows Interest Rates Rising Soon

Wall Street might crash if the Fed is not cautious enough, the more so now, after Fed President Janet Yellen reiterated the base interest will go up this year.

Kristian Rouz — Wall Street slid into the red at the close on Friday due to investors' sentiment turning bearish after the US Federal Reserve chief Janet Yellen made her remarks concerning the regulator's future policy moves. As US inflation is gradually becoming more solid, and negative macroeconomic tendencies are fading with unemployment nearing historical lows, the Fed is committed to hike its base interest rate this year. Given the major US indices have just hit their historical highs, Yellen's pledges in a perceived weak economic environment will inevitably result in short-to-medium-term volatility and increased turbulence in the markets.

In her speech before the gathering of business people held in Providence, RI, Janet Yellen expressed confidence in the US economy improving from the weakness witnessed early this year, which she referred to as ‘statistical noise.'

A portion of more solid macro data arrived from the Labor Department on Friday, stating US consumers prices in April rose 0.3%, the largest monthly increase since January 2013. A stronger inflation is a hint at a faster economic expansion. An annualized inflation in April was 1.8%, after a similar reading in March.

"For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target," and start a gradual increase in interest rates, Yellen told the Providence Chamber of Commerce.

Consequently, trading on Wall Street was mixed, with the Dow sliding 0.09%, the S&P 500 retreating 0.04%. The Nasdaq Index advanced 0.12%.

US shares are hovering just below their all-time highs, the situation perceived as alarming as stock markets gains have far exceeded the expansion in the real economy during the last couple of years. The S&P 500 is now 214% above its March 2009 rock bottom, and most shares have been steadily gaining in the last 6 years due to both accommodative Fed policies and the capital influx from elsewhere into cheaper yet solid US assets. In a healthy economic environment, stock markets retreat some 10% at least once a year as a rule, and the last time it happened on Wall Street was in November 2011. That said, US stocks are overbought, expensive and prone to crash.

A crash could occur as an out of control development of negative trends set by either a hike in interest rates or an organized withdrawal of capital. Or, most likely, both. Now, with a hike planned for this year, Yellen's job is to prepare each and every one of the market participants to the event to ensure the losses in US assets' capitalization are minimal. A sudden and massive capital flight is a possibility though as the Eurozone's bond buying program is very investment-friendly.

"We are a little overvalued, even with interest rates low," Donald Selkin of the New York-based National Securities said. "There could be some choppy seas ahead, especially if oil prices stay low or the dollar remains strong."

US Treasuries fell, anticipating more market risk, as yields rose. A 10-year US note depreciated 8/32, with yield edging up to 2.2145%. The US dollar, however, was up despite the slip in bonds and the markets' anxiety. Yellen's rate-hike pledge propelled the greenback 0.41% up to 121.52 yen, with the European currency down 0.9% to $1.1012. The dollar index posted an even greater gain of 0.97% to 96.177, suggesting grounds for a future dollar rally.