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Taper Speculation Weighs Markets But Yellen Steady

Federal Reserve Chairwoman Dr. Janet Yellen told the Senate Banking Committee on Thursday that terrible weather may explain some of the ongoing winter soft patch that has slowed the U.S. economic expansion, but the extent of the impact is unclear. Her view will likely heat up speculation over the weather, the condition of the U.S. economy, and the prospect that the Fed might consider a change in its pre-stated plan to taper bond purchases in $10 billion steps at each policy meeting. Over the coming weeks, financial markets are now likely to become increasingly reactive to each new economic data release.

Next Friday's release of the February employment report will loom over the coming week and any weakness in that data will place additional pressure on the Fed to revise the trajectory of asset purchases. Expectations are for a humdrum showing - the addition of 150,000 non-farm payrolls and the unemployment rate unchanged at 6.6 percent. While Dr. Yellen has left the door open to adjusting the pace of asset purchases, I remain convinced that short of a catastrophic series of data the probability of the Fed changing course is remote. Nevertheless, investors will continue speculating about the durability of the U.S. economic expansion in the face of upcoming data. Even Thursday's relatively benign comments by Dr. Yellen pushed stocks and bonds higher as investors recalibrated portfolios in the face of uncertainty about the economy and tapering.

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