AMSTERDAM (AP) — Stock markets posted big gains Tuesday as the new Federal Reserve chief Janet Yellen indicated that interest rates would remain low for a long period of time and U.S. lawmakers appeared to be inching toward a deal to raise the country's debt ceiling.
House Speaker John Boehner said House Republicans would vote to raise the nation's borrowing limit without any conditions attached. That would avert a repeat of the standoff that took the U.S. government to the brink of default last fall.
The main focus in the markets was on Yellen's first testimony as Fed chair since her confirmation last week. Though cautioning that the U.S. labor market recovery is "far from complete," she said she plans to press ahead with plans to trim the Fed's bond purchases from $85 billion per month to zero over the course of this year. The policymaking Federal Open Market Committee decided last December to start "tapering" its stimulus and has already backed two $10 billion reductions.
However, she said rates should stay low to support the economic recovery, a clear hint that the Fed will keep its key short-term rate near zero for a prolonged period. "The default assumption should be that the taper will continue at the current pace," said Paul Edelstein, director of financial economics at IHS Global Insight. "But the Fed's commitment to ending its bond buying does not signal eagerness to raise interest rates."
That signal, along with relief over the debt ceiling, saw stocks enjoy one of their best days this year. In the U.S., the Dow Jones industrial average was up 0.8 percent at 15,932 while the broader S&P 500 index rose 0.7 percent to 1,813.
In Europe, Britain's FTSE 100 closed up 1.2 percent to 6,672.66 while Germany's DAX advanced 2.0 percent to 9,478.77. The CAC-40 in France ended 1.1 percent higher at 4,283.32. Despite Tuesday's broad advance across stock markets, analysts were reluctant to call an end to the recent volatility, which at its heart has been due to concerns over the repercussions of the Fed's stimulus withdrawal.
"Sentiment is still quite vulnerable," said Brenda Kelly of IG Markets. "There is a reluctance to believe that, in the absence of loose monetary policy, fundamentals alone can continue to drive markets higher."
The stimulus, in its various guises, has helped shore up a number of financial assets over the past few years, notably stocks and emerging market currencies. Its withdrawal has the potential to raise volatility in the markets as recent events in the emerging world have indicated.
The mood was flatter in currency markets, with the euro flat at $1.3649 and the dollar 0.4 percent higher at 102.60 yen. Earlier in Asia, China's Shanghai Composite added 0.8 percent to 2,103.67 and Hong Kong's Hang Seng jumped 1.8 percent to 21,962.98. Australia's S&P/ASX 200 gained 0.6 percent at 5,254.50. Japan's market was closed for a public holiday. Singapore, Seoul, Bangkok and Jakarta all rose.