What Janet Yellen Said Last Week That Might Have Spooked the Stock Market

The Dow and S&P closed down on Friday almost 1%, the S&P 1.25% and the NASDAQ down 2.6%. While Janet Yellen early last week spoke of the need to keep rates low to support a soft economy and bolster employment, I wonder if it took the better part of the week for her comments to sink in.

"While there has been steady progress, there is also no doubt that the economy and the job market are not back to normal health," Ms. Yellen said Monday in a speech at a community-reinvestment conference here, her first public remarks outside Washington since she took the Fed's helm in February. "The recovery still feels like a recession to many Americans, and it also looks that way in some economic statistics."

Putting aside the "feels like a recession to many American" ("feels" makes it seem like many Americans are feeling something that doesn't really exist), we're looking at a Fed Chairman who  sounds like she's staring at the threat of deflation. If she had any confidence in a strengthening economy - specifically in GDP heading up and unemployment heading down, she'd be hinting at the possibility of tightening, as in raising the Fed Funds rate. But she's not. Indeed, after her initial floating of the Fed tapering its bond purchases, it seems she's looking to counterbalance that move with the weight of continued zero interest rates.

Add this to the ECB's latest comments about "dangerously low inflation" (something we recently noted) and we can reasonably conclude that fears of inflation remain off the radar for now. It's economic sluggishness and the fear of deflation that appears to haunt the heads of the central banks of Europe and the U.S.

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